When we are presented with the scenario that we seem to be spending a fortune in Google Adwords ,because the average CPC within our sector is 2€, 3€ or even 10€ per click, the important questions to ask are “ How can we become profitable with such a high CPC? How can we become profitable in an industry where we have to spend such a large amount of our monthly budget just to get our ads shown?”
The answer is quite simple: We must have a clear calculation of our Cost per Acquition (CPA). Therefore we must be perfectly sure about how much we are willing to pay in order to get a sale. Let’s go step-by-step:
1. What is my real profit margin?
In addition to the margin we apply on top of the price, we have to consider whether we have included all those additional costs of producing our products such as shipping cost, storage, employees… This problem is easy to solve with an excel sheet. From there, you will have a clear picture of the real cost of your product and not only the acquisition price.
Once you have done this calculation, you have to add your margin and then you will be ready to earn some money.
2. How much are we willing to pay to get a sale?
To the previous price, you have to add the price you are willing to pay for this sale. For example:
Imagine we sell a product which has cost us 50€. We will add all the related costs from this product (everything that has been a cost to us until our client has received the product). Imagine that this additional cost is +20€. If we sell the product for 70€ (50+20) we will NOT generate any profit but we will be at breakeven. Now we want to create an Adwords campaign. Let’s imagine that one sale on Adwords costs 5% of our final product price (5% of 70€ = 3,5€). Therefore our new final price is going to be 73,5€. Everything we sell over that price is going to be converted into earnings before tax and amortization for the company.
Now let’s assume we would like to have a margin of 50% of the product’s final price, so we will need to sell for 105€. From that point we can run an Adwords campaign knowing that the cost within those campaigns are going to be subtracting from our margin. So, if we manage to sell our product at 40€ CPA, we will be in the following situation:
Adwords Cost: 40€
Since we have previously monitored all our expenses, we know that we are going to be losing money for each sale.
Purchase cost: 50€
Adwords Cost: 40€
Since we have not properly monitored the costs directly associated to our product, each product sold is actually generating a loss. In reality we will think we are earning 15€ for each sale made at 105€, but the result is the same as in Scenario A!
Scenario B is a very common situation. The problem we face here is when we work with very tight margins, any miscalculation can easily tip us into losing money on every sale. We might realize this was not the right strategy but it may be too late.
Once we have everything correctly calculated (revenue and costs), we can start with working on our Adwords account aiming to avoid losing money. So, how do we not lose money? It is very easy! As long as our revenue is higher than our expenses, there is no problem.
The situation is very simple:
- Which is the maximum CPC we have to pay in Adwords to break even and assure my sales margin?
This is the formula we have to use to answer that question:
Revenue Per Click (RPC) = (Margin of each sales) x (Conversion Rate)
This formula yields revenue per each of the clicks we got. Meaning, if we are working within a 20€ margin and our conversion rate is 3%, our revenue per click is going to be: 0,60€
- Let’s introduce the Adwords cost. If we are working with a CPA in Adwords of 5€, our margin is not longer 20€, it is 15€.
Therefore, our RPC = 0,45€
From here, you will know that if the bid is higher than 0,45€ per click, and assuming that our conversion rate is fixed at 3%, we will be losing money.
This same calculaion can be done by keyword. You just have to apply to each of them their conversion rate and from there adapt your CPC
Please watch the video ( below) of a presentation entitled “ ROI in SEM and SEO” that we gave recently at the eShow in Madrid. For ROI in PPC please go to slide number 12.
Google Adwords is a very powerful machine which generates traffic to our website, some of this traffic is highly qualified some less so. The key for success is not just in the traffic that we can get from Google, it depends on how we can optimize our marketing campaigns in order to reach as many users ,interested in purchasing our product, as possible.
So, what happens when the max CPC I am willing to bid, is lower than the average CPC I can see from the results of the Adwords Keyword Planner? Or what happens when I am not even close to the minimum bid since my Quality Score is low or because my competition is bidding too high?
Strategies to get the most traffic from Google Adwords as cheaply as possible:
- Keyword Research:
Forget about bidding for generic keywords or those with high competition. Those of us who have been lucky enough not to work with the not-provided in our SEO reports, have seen that our users search in thousands of different ways. The key for a better performance is to detect those keywords.
With Adinton, we have 4 optimizations options for Keyword Research which gives outstanding results:
i) Campaign Creator: This one allows us to create campaigns with thousands of keywords within seconds. It is done by respecting relevance and properly nesting the keywords so that the hierarchy is correct.
ii) Search Terms: Adinton connects with the Adwords API every X days in order to search for those search terms we are currently not using and which could provide us with a higher conversion rate.
iii) Negative Keywords Research: Same as the previous one but searching for negative keywords.
iv) Auto Keyword Research: We have detected that by using certain parameters we can find those top keywords ( Great QS, positive CPA…) and perform keyword research using those keywords. With that we will be able to obtain thousands of new and relevant keywords (we will even filter and do not include negative keywords) within a few minutes.
The answer is less than 40 minuts.
Do you know how much time Adinton needs to perform a negative and positive keyword research? NO TIME, Adinton does that automatically while we sleep.
Do you know what kind of results we can offer? Outstanding!
- Type Match:
Another important point is the type match of the keywords. A keyword set in broad is normally more expensive (it is not always the case) but we have to pay attention to it because we could be showing our ads to those users that are not interested in our products.
- Improve your QS:
Thank you Google for having invented this parameter and I would be very grateful if you could keep making it more and more difficult each day!! Anyway, this is a parameter that rewards those accounts, keywords that work under the rules. Therefore the better your QS is, the higher your ad rank position, the lower your CPC and the more traffic you will get.
- Conversion Rate Optimization:
As we have seen previously, the conversion rate is a key factor to calculate the RPC, therefore, if we improve our conversion rate and keep our margin stable, we will be able to work with higher CPC without this being negative for our results.
- Web Analytics:
Adinton was created with the aim of finding those keywords that were not achieving any conversions and that were not helping other keywords to do so. Because of Adinton Web Analytics, we are able to answer questions such as:a) How much influence there is between a Display campaign (as we know most of the time they have a low conversion rate and a high CPA) and Search campaign?
b) How much a generic keyword influences those brand keywords?
c) How much Adwords traffic do I get once there has been a conversion for the same client?
d) Which are the keywords with the highest chance to convert with only 1 click?By answering those questions and quantifying the cost, you will be able to re-invest this cost where you know you will get a benefit. Therefore, you will see your sales exponentially increase.