The real cost of Adwords

To know whether you are really going to get a return on money spent with Adwords you need to understand your conversion rate. If you don’t know how many visitors you are turning into customers then there is no way of knowing how much to pay for a visitor and therefore investing in Adwords is really just guessing (like a lot of other forms of small business advertising).

I should preface this article by saying that I haven’t advertised in my business for about 12 months and I would love to continue down this path (I’m not a huge fan – perhaps a topic for another post).

That said, I have used Adwords on and off for my own business over the years and for clients and there are some great advantages with it. However how do you know when it’s working. Here are some very rough and simplified calculations too give you some idea.

In my experience most small business owners are not going to go to the effort of analysing their Adwords to the extent of what I have done below however I think it is useful to look at these numbers as an example particularly to demonstrate just how expensive Adwords can be.

How much is a reasonable amount to pay per click for my business?

Here is a quick and rough way I use to get some indication of what is a reasonable amount to pay per click for my business (stick with me here, there is light at the end of the tunnel of calculations).

  1. Make sure your website has a clear goal that you are measuring (if it’s an ecommerce site measure what % of visitors you are converting to buyers, if you want people to sign up for your newsletter or fill in your contact form measure what % of people do this – this is easy using Google Analytics). In my business I’m measuring completions of my contact form and I generally convert about 3% of website visitors.
  2. Now these people are not yet customers to my business so if the goal that you are tracking is something other than a direct product purchase (like mine is) then you also need to think about how many people you need to do this to get 1 paid customer. In my business for every 8 or so contact completions I get I will end up with 1 customer (I’m not great at sales) which is a conversion rate of 12%. Multiply 12% by 3% and you get .36% (or .0036) this figure represents my conversion rate of website visitors to final customers. If I calculate 1 / .0036 I arrive at 277 which is the number of visitors I need on my website to generate 1 customer.

The final step is to guesstimate how much a new customer is worth to your business (and I say guesstimate because most small businesses don’t have the sophisticated systems to really measure how much a customer is worth). You never really know how long a customer will stay with you and you want your advertising to pay of in a reasonable amount of time so I would suggest that working out the average customer spend in the first year is reasonable for most businesses.

In my business most of the sites I build are around say $2-$3,000, most customers pay for hosting or ongoing support which might be $600 / year. So let’s estimate the customer value at $3,000, perhaps $1,000 of this is profit.

So if a customer is worth $1,000 to my business and I need 277 visitors to create a customer, I divide $1,000 / 277 visitors and I arrive at $3.60 which represents the break-even cost per click. If I pay $3.60 for every click I get to my website it will cost me $1,000 to get 277 clicks which will result in 1 customer.

In my industry the highly competitive terms cost a lot more than $3.60 so it’s not really worth my while to bid on the highly competitive terms (unless I felt like jacking my prices up which I don’t). Of course there are niche terms that are cheaper that I can focus on and there are particular parts of my business that seem to generate more interest at certain times (for example at the moment we seem to be getting a lot of Magento work and the projects are generally worth a bit more).

A simple ecommerce store example

Here is a much simpler example from an ecommerce site where you can directly track the conversion rate of visitors to buyers. Jacqui runs an online store for selling handmade baby gifts. She converts 5% of the visitors to her site to customers (this is tracked through Google Analytics). 1 / .05 = 20 so she needs 20 visitors to her site to get one customer. But her products are cheap, only a few dollars each, she estimates a customer is worth about $60 to her in a year with about $30 being profit. $30 / 20 = $1.50 which is the break-even point for a visitor. If the going rate for pay per click in her industry is $3 then you’d have to wonder whether it was a great option. But if it was 5c you’d jump on it.

Adwords pay per click rates vary hugely across industries. Some industries are in their infancy in terms of adwords adoption, and there are some good opportunities for cheap and effective advertising. For other industries, I sometimes wonder whether it’s gone too far the other way and has ended up like most other outbound advertising strategies where it’s hard to see the return.

So do I use it or not?

First of all, I would suggest that small businesses do a bit of a calculation like I have done above to get a feel for the value of clicks to their site. The chances are that if their site hasn’t been well designed (in terms of its ability to convert visitors into buyers) then it will be hard to see the return with Adwords.

The other consideration is advertising is not just designed to give you a simple return and Adwords could be used as part of a broader strategy (perhaps you use Adwords for specific campaigns etc) not just simply as the main way you generate traffic to your site.

But I always suggest that clients get the Analytics setup to be able to track conversions properly and then try it for a month and see how it goes. At the end of the month sit down with your web partner and go through the stats. And don’t just look at the stats, think about people who called or visited and whether they mentioned the website (not everyone will fill in your form). If you feel like you got some good business out of the money you put in then set a reasonable budget and stick with it.

I’m interested in numbers from others so feel free to comment with your experience with Adwords and as always please share this if you found it useful.

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About Alex

Alex Retzlaff is the owner of A Website Designer and Web Circle.

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5 Responses to “The real cost of Adwords”

  1. Tony Pfitzner May 1, 2011 at 2:58 pm #

    This is an excellent summary of the issue of conversion from a business perpective. One point – is the importance of what happens during that first month of testing you refer to. There is a lot that can be done to reduce conversion costs by looking at the issue of Quality Score (QS) – particularly during this first month. QS is effectively a measure of the correlation between the keyword, the ad text and the landing page.

    If we work on the QS issue and exclude any non-performing keywords after 1 month, nearly all campaigns can be made to work.

    Thanks for the post.

  2. David Moloney May 1, 2011 at 6:00 pm #

    Hi Dan,

    May be it’s the circles I stay in, but I’ve really noticed the negativity increasing around adwords. Some people simply no longer use it. Personally I no longer use adwords as the hard yards in organic work is starting to pay dividends.

    Adwords inflation seems to keep tracking upwards – far outstripping normal inflation

  3. Dan May 1, 2011 at 6:18 pm #

    Hi guys thanks for the comments (and thanks David for the Tweet). I’ve marked down quality score for a future blog post Tony if you have done much testing and can reveal some numbers you are welcome to post a guest post.

  4. Eden February 9, 2012 at 2:33 pm #

    Great article Dan. It prompted me to look at my “set and forget” adwords campaign and the results were pretty ugly.

    Our cost to acquire a sale ranged from $0.35 – $54 depending on the keyword, so needless to say my campaign has been revised.

    Thanks again champ.

  5. Dan February 9, 2012 at 3:42 pm #

    No worries, I’d be happy with 35c! Some keywords are $10+ now just for 1 visit – mental!

    Thanks for the comment.

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