It is a commonly held belief that AdWords it is an easy way to spend a lot of money fast, with little or no return. While this can be true, a properly planned and implemented AdWords campaign can be extremely powerful, and does not have to spend a lot of money, nor does it have to do it fast, nor does it have to yield little or no return.
However, it may not work for everyone. The key thing to bear in mind is that the benefit, or the value that the advertising spend brings about should be greater than the cost of the advertising spend itself. So this means that the benefit that the advertising brings about should be greater than the click costs, ie, a positive ROI. This is pretty obvious, but I will show the equation anyway:
Value of click > Cost of click
This is a very simple formula. However, the problem lies in calculating both the value of the click, and the cost of the click.
Let’s start with the click cost. Clicks are more expensive in more competitive industries, and vice versa. Clicks relating to insurance products, or home loans for example, can cost $50 and above. Clicks in less competitive industries can cost as little as $0.01. Unless we have historical data to work with, it is difficult to estimate what our click cost would be. To give you some idea, amongst my existing PPC partners, average click costs in August ranged from $0.25 to $8.97. The average average click cost amongst my PPC partners in August was $2.06. So for the sake of simplicity, let’s use a nominal cost per click of $2.
Value of click > $2
So the value of each click to us needs to be more than $2. But what is the value of a click? Well, a click may lead to sale, or an enquiry, to which we can attribute a value. But what one click get us? Usually, nothing at all. We need to calculate the average value of a click, by finding the average value of a lead, or a sale, and finding out how many clicks we need to achieve the aforementioned objective.
Value of click = Average sale value x Conversion rate
So if we multiply the sales value by the conversion rate, we will find the click value.
If we have a range of products, which we probably do, we need to find the average sales value? Again, this varies drastically from business to business. One sale for a property developer may be $500,000, whereas one sale for a PPC Consultant may be worth only $500. For the sake of the example, let’s use a value of $1,000. But hang on – $1,000 is the sale value, don’t we need to look at profit instead? If we are strictly looking at the value generated from the AdWords ads, yes we do. We need a positive ROI. So let’s say, for the sake of argument, that we have a 50% profit margin, and that each sale brings up $500 in profit.
Value of click = $500 x Conversion rate > $5
Now conversion rate also varies hugely from site to site. Generally, and this is very generally speaking, a ‘good’ conversion rate would be 2%. Anything under 1% would be ‘poor’ and anything over 4% would be ‘very good’. So let’s again use the average, 2%.
So our average sale value is $500 and our conversion rate is 2%. Let’s plug in the figures:
$500 x 2% = $10
$10 > $5
So the value of a click is $10. This means that every time we spend $5, we make a $5 profit!
So this means that a company which makes on average $500 profit for a sale, has an average click cost of $2 and an average conversion rate of 2%, is bound to make a profit from Google AdWords, as long as the campaigns are properly planned, implemented and optimised.
We can see from this analysis that there are 3 key factors.
1) Average click cost
2) Average sale value
3) Conversion rate
A PPC consultant will be able to reduce your average click cost. There are a number of tools, both paid and free, to help improve your conversion rate. So as long as your average sale value is not too low, then there is every chance of running a successful PPC campaign.
This article is written by Chris Winn, a PPC Expert in Melbourne on behalf of Epic Marketing.