How Can You Tell if Google AdWords Is Worth Your Investment?
For some businesses, Google AdWords is one of the best online advertising channels for getting qualified buyers. Paid search ads look just like typical search results. The difference is that they show up on the top and bottom of the first page of search engine results when a designated keyword is searched.
AdWords allows you to bid on keywords so that when people search those keywords, your ads will show up on the search engine results pages (SERPs) without the need for search engine optimization (SEO).
With Google AdWords, you’re paying to outrank as many competitors as you can on the SERP.
But before you commit to paid search ads, you should take a few steps to determine whether or not AdWords is right for your business.
The first thing to do is research your competitors and the general prices of keywords
Competitor spy tools such as SpyFu and SEM Rush provide a good start to see how your competitors are doing. You’ll see predicted ad spends and actual competitor ad copy all in one place. You should use an incognito window on your browser since search engine ranking results are geared towards your search history and preferences when you’re logged into your account.
So where are you on the search results right now? Where are your competitors?
Check out their landing pages. An intelligence technique you can do on Google’s Keyword Planning tool is use a competitor’s landing page and see the keywords Google suggests you bid on based on the contents of the page.
Focus on higher traffic keywords first; keywords that have at least 1,000 estimated monthly searches. From there, take the average cost per click (CPC) of these keywords to come up with a quick estimate of what you’ll be paying.
Before you invest in AdWords, understand how your visitors behave on your website
Before you dive into Google AdWords, start with a Google Analytics account if you don’t already have one. In Google Analytics, you can see the search terms that people are using to get to your website with a tool called Search Console.
What is your baseline conversion rate on your site? With Google Analytics, you can set up goals so that you can track people who complete desired actions on your website.
You want to establish this baseline because that helps you see any potential website issues before you invest money into AdWords.
How to determine if AdWords is worth it if you generate leads before sales
You really want to think about this one: how does your sales team do when it gets a lead? If your sales team has a low conversion rate on new leads, it will inevitably change how financially beneficial AdWords is.
So what percentage of leads does your sales team convert into customers? It’s important you know this baseline number. Let’s say that your team can convert 20% of its leads into sales. They’re doing a good job, hopefully!
Before AdWords, did you have any other channel for getting leads?
Think about how much the cost is for that channel. We’ll set the baseline to $30 per lead. You’ll also want to know (through Google Analytics) how many conversions you get just through organic search engine optimization (SEO).
Think about the page you use to get leads right now - how much is the typical conversion rate for that? Let’s set your typical website conversion rate at 15% for this scenario. Finally, how much revenue can you generate from one customer? Let’s say one sale is worth $300 to you.
Let’s see this sales baseline play out with 100 leads. This would cost $3,000.
Your Current Channel = [(Total leads x sales team conversion rate) x (avg. value per lead)] – (Total leads x your cost per lead)
Your Current Channel = [(100 x 20%) x ($300)] – (100 x $30)
Your Current Channel = ($6,000 avg revenue) - ($3,000 cost) = $3,000 typical profit for those 100 leads.
So could AdWords provide the same, if not better, returns? Would those 100 leads coming in be better quality, cheaper, or both?
Here you would need to find the average cost per click you should expect in your industry. Let’s say this is $4 for this scenario. Since we used a $3,000 budget before, let’s do the same thing here.
With the average CPC set in this scenario at $4 per click, you’ll get 750 clicks for $3,000.
Also, notice that now your website conversion rate factors into this.
Cost Per Lead = (Clicks x Avg. CPC) / (Clicks x Website Conversion Rate)
Cost Per Lead = (750 x $4) / (750 x 15%)
Cost Per Lead = ($2400) / (113 Leads)
Estimated AdWords Cost Per Lead = $26.67. We can tell this is going to be better than the channel that was getting you a cost per lead of $30.
So now let’s compare directly!
New comparison to baseline = [(Total leads x sales team conversion rate) x (avg. value per lead)] – (Total leads x cost per lead)
New comparison to baseline = [(113 x 20%) x ($300)] – (113 x $26.67)
New comparison to baseline = ($6,780) - ($3,013.71) = $3,766.29
We’re pleased with these numbers. AdWords could perhaps be a more profitable channel. Hopefully, this model will work in your favor like it did here. Take note, though - while we priced the average CPC at $4 for this model, be prepared to pay more or less depending on your industry.
How to determine if AdWords is worth it if you sell physical products:
If you have a product that makes you an average of $35 in revenue (factor in any non-AdWords related costs FIRST, then subtract those costs from your baseline number) and you are spending an average of $3.50 per click, you will need to make one sale to break even with 10 clicks. If your conversion rate is 10%, this will work. If your conversion rate is lower, then you’re going to be losing money.
Here let’s say you got 100 visitors and you sold 10 units at an average cost per sale (BEFORE ads!) of $5.
No Ads = [(Product Visitors x Conversion Rate x (Avg. Product Value)] – (Total Sales x Avg. Cost Per Sale)
No Ads = [(100 x 10%) x ($35)] – (10 x $5)
$300 revenue after cost = ($350) – ($50)
So you can see with your baseline that if your site’s conversion rate is at an average of 10% and your average product cost is $5, you are still making money!
Now let’s bring in Google AdWords into this scenario.
Cost Per Sale = (Clicks x Avg. CPC) / (Clicks x Website Conversion Rate)
Cost Per Sale = (100 x $2.50) / (100 x 10%)
Estimated AdWords Cost Per Sale = $25
New Estimated Cost Per Sale = (AdWords Cost) + (Avg. Cost Per Sale)
New Estimated Cost Per Sale = ($25) + ($5) = $30
The margins are now getting much thinner - you’re only making $5 on each sale.
But the good news here is that as long as you find ways to increase your website’s conversion rate (we did set it low at 10%) there is room to grow. Additionally, you can also upsell your new customers on future offers - find a way to stay in touch with customers so that their click can become worth more over time.
Think about how you can increase the lifetime value of your customers:
As you read before, you can also upsell your customers by continuing to market post-click. You can also market products to users that you know are already inclined to buy.
Adding lifetime value to your customers - when you can add, say, a $20 upsell, your average product value can rise from $35 to somewhere around $45-$55. This can completely tip the scales for selling products.
It gives you a lot more leeway for spending on clicks and the best part is that you can upsell off AdWords entirely.
If you are good at collecting data at the purchase. Additionally, you can also market new products to previous customers on AdWords for a lower cost.
Make sure that you come in with a real budget to start:
It’s hard to tell if AdWords is going to be right for you unless you have enough data. The reason why I set $3,000 as an example of a budget is that I think it’s a good number to start with. That way, you get enough click volume to make some real data-driven conclusions.
You should go through this same exercise with every advertising channel that you go with.
Certain channels may make sense for your business, others may not. It all depends on your industry and how you can stand out.
There was one other type of business that we left out of here - subscriptions. This is because the amount of lifetime value that you can get out of a sale is potentially infinite. We’ll be writing another post on the financial model for advertising subscription-based services soon. I would definitely like to write a post on the financial model for advertising subscription-based services in the future, so look out for that!