Is AdWords getting too expensive for SMBs?

9:00 am in PPC Marketing Blog by bjorn

This is a guest post by Bjorn Espenes, founder of several Internet businesses including one that processed over $1 billion in online sales for clients. Most recently he co-founded Finch with Eric Maas bringing 10 years of building optimized eCommerce software experience to the PPC industry. You can read more about how to optimize your Pay Per Click on the Finch Blog.


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.

Opinions expressed in the article are those of the guest author and not necessarily Certified Knowledge. If you would like to write for Certified Knowledge, please let us know.

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