Want to Guarantee AdWords Success?

Those of you that know me know I’m motivated to help marketers think more like CEOs.  In my opinion, it’s a mindset that’s still woefully lacking among many marketing folks, even though we’re often sitting right on top of the data needed to make more strategic, operationally-focused decisions.  I’ll cover this topic more broadly in an upcoming post.  However…

Higgins Marketing Group - Want to Guarantee AdWords SuccessThis week I want to drill down and give you a very specific and powerful way to “market with a CEO’s mindset” using AdWords.  In fact, taking the time to read and implement the technique outlined in this post will guarantee a profit from your AdWords investment.  I’m not exaggerating one bit.  It’s simple math.

Here’s my challenge to you.  It’s time to stop chasing clicks by blindly increasing your AdWords budget based on your gut feel, or Google’s “Opportunities for Improvement.”  Guess what?  AdWords is just a software program…. It doesn’t really even know what the heck you’re selling!  AdWords has no clue how much profit lies within each sale you make.  Only YOU know these things.

If you want to really “dial-in” AdWords as a money maker, you need to pair your BUSINESS KNOWLEDGE with Google AdWords’ SOFTWARE FUNCTIONALITY.

 

The Key to Guaranteeing Profits:  Knowing How Much is Too Much

Setting bids in AdWords can be a confusing thing for some advertisers.  It’s easy to get drawn into the complexity of the bidding options and all the “important” performance metrics experts say should be considered before adjusting your bids.  The result?  Most advertisers simply set a flat keyword bid that seems “reasonable” and gets them somewhere on the first page of the search results.
But here’s the problem – What seems “reasonable” may not be reasonable at all.  It may be causing you to lose money day-in and day-out!

Higgins Marketing Group - Want to Guarantee AdWords Success

So today I want to help you determine YOUR MAGIC NUMBER – your cost per click ceiling.

What’s a ceiling amount?  It’s pretty simple.  It’s the cost per click amount that allows you to break even… where your total cost equals your total revenue.

 

When your cost per click is below your CPC ceiling:  You are making a profit (GOOD)

When your cost per click is at your CPC ceiling:  You are breaking even (UHHH… BLAH)

When your cost per click is above your CPC ceiling: YOU ARE LOSING MONEY (VERY BAD)

 

Information You’ll Need to Determine Your Magic Number

Here’s what you’ll need:

  • Average revenue per transaction (i.e., average customer order, average client deal size)
  • Cost of goods sold – excluding AdWords costs (cost to deliver your product service – e.g., raw materials, wholesale price, packaging, labor)
  • Average AdWords conversion rate – this comes from your AdWords account
  • Average AdWords cost per conversion – this comes from your AdWords account
  • (For B2B Companies)… in cases where a conversion is not an actual sale, you’ll need to know how many leads, on average, are required to generate one sale

Steps in the process

Before you can get started, you’ll need to install conversion tracking within your AdWord’s account.  If you haven’t yet done this, it’s fairly straight-forward and I cover the specifics here:  Is AdWords Delivering Results? Set Up Conversion Tracking to Find Out! 

A quick aside: I’m going to take you through this exercise based on average numbers for a campaign or an Adgroup.  Keep in mind, you can be even more precise by following these steps at the keyword level.

1) Calculate The POTENTIAL PROFIT PER TRANSACTION

(Average revenue per transaction – Cost of goods sold) = POTENTIAL PROFIT PER TRANSACTION

Note – DON’T yet consider your AdWords costs in your Cost of Goods Sold… we’ll get there)

2) Calculate The Number of Clicks Needed to Generate a Single Conversion

(1 / Average AdWords conversion rate) = # CLICKS NEEDED TO GENERATE A SALE

3) Calculate your COST PER CLICK CEILING

(Potential profit per transaction / Clicks needed to generate a sale) = CPC Celling

 

Let me walk you through a quick business-to-consumer example:

Higgins Marketing Group - Want to Guarantee AdWords Success

Let’s say you’re selling GPS-enabled watches for runners.  Each watch sells for $120.00. Each watch can be manufactured for $36 and packaged/shipped for $7. (… so total per unit cost of goods sold is $43)

We’ll say your current average conversion rate from AdWords traffic is 3.5%

1) Calculate The Amount of PROFIT PER TRANSACTION

(Average revenue per transaction – Cost of goods sold) = PROFIT PER TRANSACTION

($120 – $43) = $77

2) Calculate the number of CLICKS NEEDED TO GENERATE A SALE

(1 / Average AdWords Conversion Rate) = CLICKS NEEDED TO GENERATE A SALE

(1 / .035) = 28.6 Clicks

3) Calculate your COST PER CLICK CEILING

(Profit per transaction / Clicks needed to generate a sale) = CPC CEILING

($77 / 28.6) = $2.69 is the Cost per Click Ceiling

 

So assuming your inputs stay consistent (cost of goods sold, conversion rate, etc.), $2.69 is you magic number.  Unless there is a compelling reason, you will NEVER want to bid more than $2.69 for a click. Let’s take a look at the reverse math to prove the point…

$2.69 per click * 28.6 clicks = $77 per AdWords conversion/sale… then add your manufacturing and shipping costs of $43… and you’ve spent $120!  You’ve made nothing.

But let’s face it, no one’s in business to break even, so you should aim to stay well below this ceiling bid to optimize profits.

Armed with this data, it makes it VERY easy to “dial in” your AdWords cash machine!  You can literally guarantee your profits!

Knowing my absolute max CPC is $2.69, what if I kept my average cost per click to $1.40?  We’ll…

$1.40 per click * 28.6 clicks = $40 in AdWords costs, then add your manufacturing and shipping costs of $43… you’re total costs is $83 per watch.  You’re selling each watch for $120.  You’re now making a $37 profit per unit!

 

How Does All This Work with a Business-to-Business (B2B) Company?

In short, the logic works EXACTLY the same way… but there is just one extra consideration.

When calculating the number of clicks required to make a sale, you’re a little different than B2C because clicks don’t necessarily mean sales.  In a B2B environment, clicks usually equate to sales leads.  Then each lead must be developed over time (usually through marketing automation or contact with a sales professional) in order to make the sale.

To arrive at your magic AdWords number, you’ll also need to know how many conversions/leads on average it takes to generate a sale.

 

Let’s work through one last example to help you B2B marketers.

Higgins Marketing Group - Want to Guarantee AdWords SuccessLet’s say you are selling consulting services.  You’re average consulting contract is $17,000, and that work can be delivered (cost of goods sold) for $12,000.

Currently the conversion rate you are experiencing from AdWords traffic is 5%.  You also know that a sales person must speak to an average of 9 leads to close one consulting contract.

1) Calculate The Amount of PROFIT PER TRANSACTION

(Average revenue per contract – Cost of goods sold) = PROFIT PER TRANSACTION

($17,000 – $12,000) = $5,000

2) Calculate the number of CLICKS NEEDED TO GENERATE A SALE

a) (1 / Average AdWords Conversion Rate) = CLICKS NEEDED TO GENERATE A LEAD

(1 / .05) = 20 Clicks Needed to Generate a Lead

b) (# Clicks needed to generate a lead * Avg number of leads needed to make a sale) = CLICKS NEEDED TO GENERATE A SALE

 (20 *9) = 180 Clicks Needed to Generate a Sale

 3) Calculate your COST PER CLICK CEILING

(Profit per transaction / Clicks needed to generate a sale) = CPC CEILING

($5,000 / 180) = $28 is the Cost per Click Ceiling

 

So there you go.  Your magic number is $28.  At an average per click cost of $28, you won’t make money, you won’t lose money.  Armed with this information, you now have a sense for the impact your AdWords activity is having on the profitability of your consulting contracts.

I know I got into the weeds a bit this week, but this is important stuff.  Whether you are managing your AdWords account or hiring someone else to do it, knowing your cost per click ceiling is absolutely critical to making money with AdWords.

If you have any questions or are looking to get more out of your AdWords account, drop us a line at info@higginsmarketinggroup.com.

Hope this helped!

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