Here’s A Secret – In Paid Advertising Cost Is Irrelevant, Look At Your Rate On Investment

When bidding on competitive keywords in Google the price advertisers are charged per click can be high if an advertiser wishes their ad to appear on the first page or ideally in the top 1-2 positions. I recently read an article that advertisers bidding on the keyword phrase “Personal Liability Attorney” in the Manhattan, NY area were paying a staggering amount – in excess of $100 per click!

I can’t verify those numbers, but I’ve recently had my Google representative (a perk of being a certified Google partner agency) run some numbers for a couple of potential clients.   For keywords related to bail bonds in the Los Angeles area such as bail bonds agent, bail bonds service, bail bonds agency, the cost per click ranges in between $25-$30 per click for the top ad spot.  For a real estate agent located in the central California valley region, keywords related to real estate agent range between $1 and $1.25 for the top spot. As you can see, the average CPC (cost per click) charges can vary greatly between verticals as well as between locations. However, even if an advertiser is in an industry or location where there is a high CPC for certain keywords to get placed on the first page, there is a good reason why that should not necessarily scare advertiser away.

So the question is why would advertisers be willing to pay such a steep price as those listed above for every visitor being directed to their website through a Google Ad?

Let’s use an analogy to better understand.  Assume someone told you that if you spent $3,000 you would get back $3,500.  Would you do it?  Probably, but maybe it would depend on how much work you would need to do to make that $500.  However, let’s assume someone told you if you spend $3,000, you would get back $30,000.  Would you do it?  You bet you would!

Review-and-Ratings-System

What I have just described is a simple example of ROI (return on investment).  ROI is a profitability measure that evaluates performance of an advertising campaign by dividing net profits by net worth. For Professional Services, ROI is even easier to calculate since the cost of goods is generally time rather than a physical product. To calculate divide return (benefit) of an investment divided by the cost of that investment.

The Rate On Investment Calculation

Professional Services ROI Calculation:

Return (benefit) / Cost of Investment = Rate On Investment

Example 1: $3,500/ $3,000 = 1.666
Example 2: $30,000/ $3,000 = 10

Ecommerce ROI Calculation:

$ Sales  / Cost of Investment + Cost of Goods Sold + Shipping Costs = Rate On Investment

As you notice from the above example calculations, the higher the ROI the better for the advertiser.

The easy answer to the question to why advertisers are willing to pay such high prices for every visitor clicking on their ad is simple.  Advertisers have calculated (or at least should have) that their ROI is more than 1 showing that advertising even on highly competitive keywords is being done at a profit.

So here is the secret, having to pay a high CPC should be considered irrelevant.  The number that actually matters is the ROI calculation. 

Will your advertising spend make a profit?  There is a bit more to calculate other than just ROI such as lifetime customer value, average customer value etc, but for simplicity the calculations above give a great idea of how to ensure profitability using a straight ROI calculation when determining the success of your advertising campaign.

Tracking Revenue Generated

It is important to track all of your marketing to ensure profitability, but it is even more important when dealing with high dollar CPC investments.  Google analytics is a free tool available to all advertisers and although there are undoubtedly more robust systems available, Google Analytics when used correctly provides sufficient tracking capabilities.

For eCommerce companies, tracking sales is an easier task.  The goal is selling a product and in order to track an advertiser simply needs to place a Google provided conversion tracking script on the confirmation page of their website.

For Professional Services, tracking conversions and sales is a more involved process since customers are not going to order services such as legal counsel or dental services online.  In order to properly tack in order to effectively determine an ROI there are numerous things that can be done.  Tracking a contact page is a great start.  If an advertiser can tell how many contact page submissions have been generated from Google AdWords they can then calculate what percentage of contact page submissions resulted in sales and multiply by the average customer value.  Another way to track return on investment is by making sure the advertiser know the source of incoming phone calls.  This can be done by using either a unique phone number geared toward specific ads and tracking those results or by simply asking callers where they found an advertiser’s service and keeping accurate records.

Although it provides challenges, creating an accurate ROI is possible and should be done as accurately as possible in order to determine the success of an advertising campaign.

The price per click from different industries to different parts of the country can vary drastically.  However, just because the area you are in may be more competitive, it does not mean that advertising using Google’s Pay Per Click cannot be done profitably.  It does mean that advertisers need to make sure campaigns are optimized and tracking is in place before spending your advertising dollars.

Still need help or looking for someone to bounce ideas off?  I am currently offering free marketing strategy sessions to those interested. Contact True Online Presence at 1-888-456-6943 to schedule.

Happy Marketing!

ABOUT THE AUTHOR:

Andy Splichal is an online marketing strategist  with more than a decade and a half of experience helping companies increase their online presence and profitable revenues.  Although this blog focuses on driving profitable traffic through Google AdWords, True Online Presence offers additional services for lead generation as well as other proven marketing strategies customized for each client.