Do 90% Of AdWords Accounts Operate At A Loss?

I recently heard two respected AdWords consultants speculate that 90% of AdWords accounts operate at a loss. In other words, cost more than they earn.

In my experience managing AdWords accounts this is probably accurate.

Every AdWords advertiser should take a hard look at what they are spending, and what they are getting back. This isn’t always easy to work out at a glance, but David Rothwell recently shared a link to a free online tool called the AdWords Cash Flow Calculator.

With just a few inputs it tells you whether your AdWords account is operating in the black or the red. If you have an active AdWords campaign you should go ahead and use it now.

Having said all this, there is more to Google AdWords than meets the eye.

The most profitable AdWords advertisers I see actually use AdWords at a loss, in order to add names into their database. They then earn their money in the back end — by selling to that customer again and again. This takes a good CRM system, and a sophisticated back end sales process.

The money is always in the back end, not the front.

Because AdWords is a self service advertising platform, the barriers to setting up an ad campaign are low. In most cases, the price you pay for a keyword normally reflects the amount of money being spent by people doing that particular search. Sustained high prices indicates money in the market. As more advertisers weigh in with higher bids, this drives the price up.

Very few advertisers however seem to know whether they are making or losing money on these bids.

For the main keywords in your account, you need to know your break even point. Break even is the most you can afford to spend on a click without losing money. The formula you need is:

Break even = Customer lifetime margin * website conversion rate (for that particular keyword)

If your customer lifetime margin is $100 and conversion rate is 2%, you can only afford to set maximum CPC bids of $2 for that term.

If the cost of appearing on page one is actually $4, then you have a problem. Your two options are to:

  • Increase your customer lifetime margin. Improve your follow up processes, introduce more products, raise your prices.
  • Increase your conversion rate. Double your conversion rate to 4%, and you’re in business.

It is perfectly acceptable to over-spend on a keyword in the beginning. It takes a little time to accrue quality score information on a particular keyword, and you may find you can lower your bids after the first week — assuming you have high click through rates.

AdWords is an ongoing optimisation project. You just need to know what your break even point is, and work on raising your break even point over time. Don’t bid above it forever.

People mistakenly think AdWords is all about clicks. In reality, it is about conversions and customer lifetime value.

Another benefit of running AdWords is you accumulate data. You discover which messages and offers work. You can take your winning messages and extend them to your offline marketing.

Take your winning ad copy, and use it in your on-page SEO. Use winning ad headlines in your email subject lines. Add high performing offers to your telemarketing scripts.

Extending your AdWords results offline is another way to make AdWords pay for itself, even if you make a loss up front.

AdWords is best used as your marketing testing ground. Find out what works on AdWords, and extend what you learn there to other marketing channels.

Finally, The Shameless Plug

Find out more about my PPC management service.

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