To Eleven Marketing

Advertising on Google’s Adwords
Search engine Marketing is one area of advertising that is still hot an dcontinues to grow, with more and more businesses adding it to their marketing mix.  Now there are a plethora of firms out there as well who will offer to manage your SEM budget for you, to get the most out of your ad dollars.  However, I see a lot of agencies focusing on getting the top position, paying a premium for their ads and effectively, wasting their clients money.  For those of you still not familiar with Search Engine Marketing,  here is the basic concept: A businesses purchases a keyword(s), where their ad shows up when the keyword is searched on the search engine site (either Google, Yahoo, Bing, or one of the minor networks of other search engines, but we will refer to Google for our example), and also on affiliate sites that run “Google ads” on their own pages. Businesses pay per click, the cost per click is set by bidding, that is, each business sets a maximum amount they will pay for a specific keyword, and the obvious strategy is to bid just a little more than a competitor so your ad will be higher in position. Now since Google originally launched this program they have added other factors, such as your “Quality Score” which can affect your position as well, but for this first example we’ll focus on the main bid vs rank aspect. And there is a problem with this strategy, and it hinges on the pricing model Google has set for its adwords model. If you are new to advertising on Google, you should be cautious about trying to get the number one ad position. When you sign up you will see the top bids for a keyword. It’s easy to bid a few cents more and grab the top spot. However, your competitors have also set a maximum bid that could be much higher than what they are currently paying for the number one position. The result is that as soon as you make the highest bid, Google software ups the competitor’s bid to a penny more, and will keep doing so up to the maximum bid. This works to neither your benefit nor your competitor’s, but to Google’s, who gets the maximum amount for each keyword. Even when you are both at your maximum bid, you can continually raise the maximum in an effort to get the top spot, or top spots, depending on the number of businesses vying for the specific keyword. So what is the end result (besides Google getting rich)?
One business I know started advertising on Google to promote a new ecommerce site for a nice product line. Their top keyword cost approximately $2.00 per click when they started, and there were two existing competitors advertising. In an effort to start the site with a big push they bid enough to get the number one position, and a maximum bid to stay there. Of course the current advertisers were reluctant to give up their spots. Within two months the cost per click rose to $4.50 per click. I imagine Google sitting back and laughing, watching these three businesses go back and forth, doubling the value of a single keyword. The problem, for all three businesses, is the cost per order explodes. Let’s say you can sell one of out ten people who click on your ad, That means in this case the cost per order jumps from $20 to $40. When the average sale was approximately $100, your margins just dropped another 20%, which might make sales go from being profitable to unprofitable.
So what is the solution? Do you cave and settle for a lower ad spot below your competition? Absolutely. It was your ego telling you that the number one spot was preferred to begin with. Think of it this way: when your competitor is above you that means he pays more for every click than you are – that’s a good thing. He might end up getting more clicks, due to his higher position, but not necessarily make more money. Let’s do some math:
Assume over a month you are in third position, you get 400 clicks in 30 days at $2 each, so advertising cost is $800. If 10% of those people actually purchase, and average purchase is $100, your gross revenue is $4,000 (400 x .1 x $100), and gross margin after advertising expense is $3,200 ($4000-$800) – so ROI on your $800 is 400%.
Your competitor in the number one position is paying $4.50 per click, but due to his higher position he gets 600 clicks in the same period. However, there is no reason to believe his conversion percentage (from click to sale) would be any different from yours. Yours could be even higher if your web site is designed better. So what is he getting? Gross revenue is $6000 (600 x .1 x $100) and gross margin is $3,300 ($6,000-$2,700 in adv.) – ROI on $2700 is 122%
So you see in this case he would only be making $100 more, but having to tie up over 3 times the cash to get it.  Here I plugged in numbers just for an example. You must figure the cost of each alternative for each keyword you are considering. You can see for each keyword what the cost per click is for the top 5 spots, and then you can figure which is the most profitable position.

There are a few things to keep in mind here though for long term planning.First is this idea that there are limited customers out there for you on Google.  The logic, some say, to getting the top spot is the need to get more click thrus, as if there are only so many to be had, but that is where people underestimate the sheer audience on Google.  I have worked on some global campaigns with very large budgets, and we still have to cap our campaigns, because we cannot afford to buy all the potential click thrus Google could deliver on a set of keywords – and that is managing a list of 30-50 keywords. There are companies out there who will manage your SEM telling you that you need to manage 1000’s of keywords, when 20 is probably enough, again, because you liekyl cannot buy all the potential clicks from even the top 20 keywords.

The other issue to consider is the lifetime value of a customer. In some cases you would prefer to pay more in advertising to sell a higher number of people through Google even if your margins are less on the current sales. The reason you would do this is the hope that they will return to your site without having to go through Google, and so you will get a second sale without having to pay the same high acquisition cost. Again, do your math. Instead of figuring average revenue from the one sale, figure average revenue from future sales (weighted by the percentage of customers who make repeat purchases).
Ultimately though, you have to assume that the cost per click for all positions will rise as more businesses enter into keyword advertising, and that the rates for the number one and two positions will rise faster. Unless you have customers who make frequent repeat purchases at significant average sale amounts, it is likely that taking a number three or four spot and keeping advertising costs down is the most profitable plan.