by bjorn
Is AdWords getting too expensive for SMBs?
9:00 am in PPC Marketing Blog by bjorn
This week there were several articles written stating that the cost of using Google AdWords has become too expensive for SMBs. The old saying, “If all you have is a hammer, the world looks like a nail,” applies. If that is the case for an entire industry, the cost of nails is likely to increase. Is an entire industry missing out on the advantages of advertising online?
Google AdWords was launched in 2001, and the method that advertisers used for measuring success was initially CPM (cost per thousand impressions); then it went to CPC (cost per click); and then it arrived at CPA (cost per acquisition). This is how the majority of online advertisers measure their success — How much does a conversion cost and how many can you get. This is how it has been for many, many years.
In our experience, we have found that in any industry most advertisers will value every conversion roughly the same. For example, in the consumer electronics industry the CPA runs around $20, and the average conversion is worth approximately the same to most companies (including affiliates). For simplicity, now assume that the average conversion rate in the consumer electronics industry is 1%.
If you break it down to a keyword/click level, what happens when these companies start bidding on the keyword HDTV? They are all willing to pay $20 per conversion, their sites convert at 1%, and they will bid $0.20 as their Max CPC. This becomes insanely competitive: Someone who has a site that converts at 2% can bid $0.40; Someone else decides to be more aggressive and ups the CPA goal to $30, and they can bid $0.30 as a Max CPC. Over time this drives the cost for that click up, and if you want to compete for the click you have to keep increasing your bids. At some point you realize that your CPA is too expensive, as shown by many recent articles written on this subject. Sounds like a familiar story? This may be the biggest challenge with online advertising, however it may also be the biggest opportunity we have seen yet!
The problem with the above is obvious; everyone is bidding for the same CPA in principle. The $20 CPA is the Nail I mentioned above. Now consider this: If you are bidding on the keyword HDTV, a conversion is likely to sell an expensive TV. It could be a $500 or a $4,000 TV that gets sold. If it is a $500 TV, would you pay more than $20 to sell it? How about if it was a $4,000 sale? I am sure you would be willing to bid more if you knew you were selling your most expensive TV. Easy enough, but what happens when someone that did the search and clicked on your Ad purchased a $15 cable. You will not be willing to pay the $20 — you may be only willing to pay $4.
I just explained Value based bidding (CPV); if you know what the conversion will be worth, you will bid differently. If you are thinking “of course I would,” then why are you not doing it? The Value of a conversion is different for each advertiser. One may sell more expensive items; one may have higher margins; one may have higher conversion rates; one may be better at adding additional items in the cart; one may be selling warranty agreements that add to it. It is an endless list of what might make a conversion have different Value for each advertiser. Here is my question: Why are they all bidding for a CPA target? Why are they not bidding for each keyword based on how much revenues it is generating?
Google AdWords Conversion Tracking and Google Analytics both let you track the Value (Revenue) that comes from each conversion. If you are not doing this, you are simply using your ad budget as a marketing expense when you could use it as sales commission.
We have clients in most industries, and most industries are operating in CPA mode. Guess what happens when we help them start bidding based on revenues? Each keyword gets a custom bid based on revenue history, resulting in higher revenues (higher Max CPC for high revenue generating clicks) and higher profit margins (lower Max CPC for clicks generating lower sales numbers). Our clients now have more and better information to base their bids on than their competitors.
If you act on this, you may find yourself ramping revenues and profitability fast instead of thinking it is too competitive and that you cannot make money using AdWords any longer. This is the ultimate closed-loop advertising where you put $1 in and you know how much comes back. The world is no longer a nail.
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Bjorn, this is a nice post! Great reminder that the focus has to be at the keyword level and the revenue and profit associated with that keyword, and that you should be more than willing to taking the cpc higher if the keyword warrants it. It reminds me of the same situation in direct mail: We used to own a retail store and would send out direct mail pieces that in total might cost $1,500 each mailing. Our conversion rate was always under 1% and our cost to acquire a customer was in the $200 – $300 range but the average order was generally around $3,000, could occasionally be higher than that, so I was willing to spend quite a bit more to acquire customers.
Hi Toby! Thanks for the nice words! Great that you could get the data for off line campaigns, most can’t! What keeps surprising me is that most do not even track Value (revenues) for their AdWords spend…flying blind seems to be a popular sport
Interestingly enough, A company I work for here in Australia has just been opted in for Value based bidding. If revenue value is imported into AdWords then the system will work to achieve your desired ROI. It works in a similar way to the DCO. It seems Google understands the importance of value (or revenue) based bidding and is encouraging it to ensure the marketplace remains competitive.
CPA bidding van be very counterproductive, especially with affiliate marketing. Affiliates get the same (CPA) compensation for any sales they make, so they’re sure to focus on low-value, low-competition conversions. When dealing with webshops, or multiple conversions with different values, CPV is definately the way to go!
Absolutely! The challenge most affiliates face is that they cannot get to the conversion/transaction data beyond the click-out/web-form submission stage.
Even in programs where the affiliates are paid a percentage of sales, I have yet to see the affiliate getting the data in return that ties the click (keyword/ad) to the revenues, making it impossible to do a CPV optimization.
Always great to read your posts, Bjorn.
Why do some advertisers like and use CPA so much? Because it’s easier to use an average instead of rolling up your sleeves and doing some more serious work.
I for one don’t like CPA at all. Precisely because not all conversions are the same.
Which is why I like to look at the margin per view each product brought me so far and bid for keywords closely related to that product (usually sku-related).
Of course, I still get people looking for A and ending up buying B, but that’s as close as I could get.
What I also like a lot is how Google Analytics (maybe other solutions as well) tells you what search terms were used by people which ended up buying a particular product and how they differ from search terms used by people who bought another product.
But such analysis takes time. It doesn’t happen as quickly as computing the average margin per sale.
Spot on! The often unpredictable relationship between keywords and products sold (I wrote a blog post on this a while ago (http://www.finch.com/en/blog/10187-why-traditional-campaign-structures-belong-in-the-past) surely complicates how to optimize.
CPV is a more accurate way than CPA for anyone that can measure revenues, and the benefit is two-fold: (1) Maximize revenues through bidding higher on performers, and (2) Improve profits by bidding less for non-performers.
Better yet, if you can measure i.e. margins or profit and return that to the keyword spend history, you can gain profit vs. revenue control. It is easy to get the revenues tied to the ad spend through the Value variable, but often much harder for merchants to insert the margin or profit number as that has to come from somewhere else than the cart (accounting, erp, product data base, etc). It never stops to surprise me how many do not track revenues, and it is often the first thing we do with new clients…get the data tracking right.
Finch pioneered doing CPV based bidding, and have just released (beta by invitation) a product that does CPP (cost per profit) bidding as well. Naturally I am making the case for doing all this in software because that is what Finch does, but in the end it is about enabling the freedom for the merchant/advertiser to optimize the outcome from their advertising spend however they want (CPA, CPV, CPP, life time value, etc etc.). Capturing this information and keeping it current on a daily basis for a large keyword bank is simply not feasible manually.
It is who has the best information AND act on it that competes most effectively in the long run, and the competition is for the best clicks Google sells…but based on a merchants ability to monetize (conversions, revenues, profits, etc.). Every advertiser is unique because of different conversion rates, profitability, up sale ability, repeat business, return rates, etc etc…), all making for everyone needing a highly customized financial objective. This closed loop makes it possible to view online advertising and AdWords as a money making machine within each advertisers’ financial constraints, just need to capture and use the data right.
Sorry for the long response, but this is in my opinion the holy grail of online advertising. Connecting the costs with the financial gains, then automate to repeat!