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How to Make More Money in AdWords by Spending Less

ppc-scrooge
Not turning a profit from AdWords? Give them less money. Image source.

Ever wondered why Google AdWords makes you pay more to appear higher on the page?

Like many business owners I speak to, you may think they charge more because people are more likely to buy from you if you’re in a top position.

Well, this isn’t quite accurate – and the subtle misunderstanding can seriously hamper your ability to run a profitable AdWords campaign.

Here is the one piece of information that can help you generate a positive ROI from your AdWords spend immediately:

Conversion rates don’t vary with ad position.

In other words, an ad in top position will generate more clicks but won’t generate more conversions per click.

Why does this matter so much? Let’s look at an example.

Say you have a website that sells ladies shoes and you find that the exact match keyword “ladies shoes” converts at 2%, with an average purchase amount of $60 (out of which $30 is profit).

If your average CPC for this keyword is $2, then you’ll get $30 profit for every $100 you spend. In other words, you’ll lose $70 on average for each sale you make.

Booooo!

Now, let’s say your objective is to break even on AdWords spend to acquire a new customer, knowing that you should be able to follow up via email to generate repeat purchases.

This means that for the 50 clicks it takes to get you one conversion, you can only afford to pay $30. Accordingly, your max CPC should only be:

30/50 = $0.60/click

If you adjust your max CPC for that keyword to $0.60, you’ll hit your target of breaking even for each new customer you acquire through AdWords.

I realize this sounds too good to be true. Not making a profit from AdWords? Just give them less money!

So what’s the catch?

When you reduce your bid, your ad position decreases.

If your initial $2/click bid was getting you an average position of 1.4 (i.e. it was at the top most of the time) and you were getting 50 clicks each week, you might find that your new bid of $0.60/click gets you an average position of 5.8 and it takes you 8 weeks to get the same 50 clicks.

The difference is that by the time you get the 50 clicks you will have broken even on your ad spend instead of losing $70.

In some cases, however, you may find that reducing your bid will lower your position so much that you don’t get any clicks at all. The only way to generate a return for those keywords is by improving your conversion rate or increasing your lifetime customer value…

The importance of lifetime customer value

When you record a conversion using AdWords conversion tracking, you can assign a “conversion value”:

PPC: Conversion value

This tells AdWords how much money the conversion was worth to your business.

This can be the same for each conversion. For example, you might use your “average revenue per user” for a SaaS business. Alternatively, you can change the value for each conversion; on an eCommerce website, you might set the conversion value to be the total transaction value for a sale.

Once you are attributing a value to each conversion, you will be able to use the Value/Cost field in AdWords to determine which keywords aren’t performing at your target ROI.

This seems pretty simple, but deciding what value to assign to each conversion is a subtle and critical decision. Let’s look at some scenarios in which assigning the wrong value to your conversions could seriously throw your numbers off:

Example 1: For the website that sells ladies shoes, if you only base your bid adjustments on a single average purchase value, you won’t be taking into account the fact that people who search “ladies evening shoes” typically spend more than people who search for “ladies flip flops”.

Example 2: If you’re running a SaaS business which makes accounting software, you might find that people who sign up for a free plan after searching for “tax compliance software” generally end up upgrading to your most expensive plan, whereas people who sign up for a free plan after searching “free accounting software” never upgrade to a paid plan at all.

In both eCommerce and SaaS businesses, there is a tendency to use a variant of average revenue per user to calculate the lifetime customer value because it is the simplest to calculate but, in both cases, cohort analysis can be more effective.

A detailed discussion of calculating lifetime customer value is beyond the scope of this article, but there are lots of great articles on the subject.

It’s difficult to make accurate predictions of lifetime customer value and decisions about bid adjustment without plenty of sample data, so you should expect that your conversion values will become more accurate over time.

The key is to always put effort into knowing your lifetime customer values and attributing conversion values as accurately as you can, given the data you have available at the time.

Not knowing lifetime customer value can cost you

So why would anyone ever bid more on AdWords to get the top position if they can get the same clicks that convert at the same rate by paying less money?

The answer is that, for any given search term, there are only so many clicks that Google can sell you and the lion’s share of those clicks go to ads in the top position.

If your business has a higher lifetime customer value (or a more accurately calculated lifetime customer value) and you know that you can pay more while staying profitable, the opportunity cost of not buying the most clicks you can afford exceeds the money you would save by getting your clicks more cheaply.

A business that knows exactly how much they can bid on each keyword in their campaign while remaining profitable commands a huge and sustainable competitive advantage.

For this reason, accurately calculating your lifetime customer value is something you should be keenly invested in.

You might even find that if you calculate your lifetime customer value accurately, a campaign you thought was unprofitable was in fact profitable!

Why not let Google do the heavy lifting?

If you’ve followed the advice in my previous article and have your spending targeted into ad groups with one ad and one exact match keyword, you can use Google’s Conversion Optimizer to set “cost per acquisition” or CPA bids.

These essentially do the above calculation for you automatically and continuously. Conversion Optimizer is most useful for adjusting bids across Google’s Display Network but can also be a great way to automatically adjust bids in your search campaigns.

However, if you’ve put the effort into knowing the different conversion values for each of your keywords, you’ll have a different target CPA for each ad group anyway, so setting the max CPC bid is going to be the same amount of work.

I don’t know whether it’s because I’m a masochist or an automatonophobe but I always prefer to do my bid adjustments manually.

The best course of action is to test each strategy and see what works best for you. But at the very least, look at analyzing your bids manually before switching over to CPA bids.

That way you’ll have a better feel for what should be happening and will be able to see how well Google’s automated bid adjustments are performing in comparison.

Bid optimization can be so easy it feels like cheating

A lot of articles make CRO sound as simple as A/B testing a couple of different button colors and then sitting back and smoking cigars while the money rolls in, but the reality is entirely different.

Especially at the very low volumes that many of us can afford when we first start spending on PPC advertising, a more tactical approach is needed – and that’s where bid optimization comes in.

And while it’s true that when you adjust your bids and lower your position on the page you will miss out on sales, the sales you do make will at least be profitable.

This way, you can then work on optimizing the rest of your sales funnel without losing sleep over how much cash you’re hemorrhaging on AdWords.

— Iain Dooley


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About Iain Dooley
Iain Dooley runs a full service digital marketing agency called Decal Marketing, which specializes in AdWords training. They can manage your campaigns or teach you how to find and dominate an AdWords niche for your business in just 3 hours. If you’d like to see a concrete, repeatable strategy to run your AdWords campaign you can buy his eBook “Your First 3 Months on AdWords.”
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Comments:

  1. Dez

    Great article. I am currently running a small budget PPC campaign and keep getting calls from Google saying I am missing out on xxx share of clicks due to low bids etc. But my monthly budget gets spent in full and I am happy that we might not be first for each search. Being in the Real Estate industry I know that people looking do not just auto click the top result on Google and go nowhere else. Peoples online behavior is very industry/product dependent in my opinion.

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  2. Sundeep

    Right Ad copy, keywords and targeting is the secret sauce of AdWords… thanks for shoring the info.

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  3. James

    Nice post Iain. What are your thoughts about managing bids at a portfolio level versus a keyword/ad group basis?

    In the example above about “ladies shoes” operating at a net $70 loss on a 2% conversion rate, how do you factor that in when bidding for target volume and ROI at a department level such as the entire Ladies Shoes department? If the keyword/ad group was operating at below target ROI, but still profitable, and your IS was maxed out for all of the products/ad groups where you are hitting target ROI, do you feel it’s acceptable to buy those extra conversions at a lower than target ROI when there isn’t anywhere else to spend the money at a better ROI?

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    • Iain Dooley

      Hey James, if it wasn’t a matter of more accurately calculating lifetime customer value (ie. you genuinely knew that you would lose money, in the long run, on those advertising dollars) then it’s a question of opportunity cost and competition; that is if the cost of not getting those sales exceeds the money you will lose by buying them unprofitably, then you should buy them. If you just have a marketing budget that you have to spend and you can’t calculate some reasonable way to get a return or advantage from spending them in one place, you should spend them some place else … Google isn’t the only PPC game in town (although it is certainly the biggest ;)

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  4. Kat

    I love how much effort you put in sounding like a real person who puts out valuable information with details that make sense and matter. It’s so easy to feel lost in the PPC business.

    Thank you.

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    • Iain Dooley

      No worries Kat, yes the advice can be quite alienating a lot of the time. It’s really not that hard, this stuff, when you explain it right.

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  5. Dan Chen

    Another tip I can add to this is to make sure that you connect your Google analytics account to your adwords account. Once you have your goals setup in Analytics and you are connected to Adwords, you must also go back into Adwords’ Conversion Settings 24hrs later to manually import your Analytics goals. Once you have your Analytics Conversion Goals imported to Adwords, you must then activate CPA bid optimization settings for your campaigns or ad groups. Once you get all of these things properly setup and running, just sit back and be amazed as your average CPA plummets toward absolute zero!

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    • Iain Dooley

      That’s absolutely right, Dan. The more data you give Google to calculate your CPA bids, the better it will perform, thanks for the comment.

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  6. Nate

    Well written article that explains the concept of the Adwords balancing act – nice share!

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  7. Stephen Pratley

    Google doesn’t just rank your ads on the price paid though, and that’s a critical bit of knowledge.

    The actual calculation is the bid price x the click-through-rate (CTR) x an adjustment for quality score.

    i.e. if your ad gets a very high CTR, it’s possible google will rank you ahead of someone paying more per click. I’ve done this many times when pushing a really strong offer, or where I’ve had more margin to play with than the competition..

    Ignoring quality score (which will be the same for any ad position) if you lower your bid, you lower your position but also the CTR as the #1 slot usually gets the highest CTR.

    The best tactic is usually to start off bidding high, then work hard on testing ad copy and landing page quality score. Over time (usually a couple of weeks) your bid cost will come down dramatically.

    If you don’t have much budget then limit your campaign to certain parts of the day or week when either your conversions are higher, or there is less competition. Also tighten up your campaign by only bidding on exact matches of your desired keywords, cutting out mobile devices (especially if you dan’t have mobile optimised landing pages).

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  8. Naina

    Hey!!! Really very great tips… I applied the tips and it really helped in cost cutting…. Thanks a lot..

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  9. Jordan Older

    What if you want to make a profit? How can you run a business when your goal is to just break even?

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    • Iain Dooley

      Are you referring to this bit:

      “Now, let’s say your objective is to break even on AdWords spend to acquire a new customer, knowing that you should be able to follow up via email to generate repeat purchases.”

      This is just an example but in many cases you won’t expect to make a profit on your ad spend from the first sale. The key to success is and always has been customer lifetime value. If your customers only buy from you once, then you will be outbid by competitors who can break even or even lose a bit on the initial customer acquisition because they know customers buy from them repeatedly, they know how much each customer is worth and therefore how much they can safely spend to acquire them.

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  10. Jordan Older

    If my goal is only to make a profit “sometime” in my life, then wouldn’t that make me a failture most of the time? That doesn’t seem like sound logic and it may confuse people who can’t think of the big picture and that making a profit on everything is key. A company, no matter how big, will eventually go bankrupt if it’s only trying to make a profit “sometime” in the future because that future will never come. Now if they are trying only to gain market share then put everyone else out of business then raise prices and lower advertising spending so that they make a profit on every sale in the future (example: Amazon) then that is a plan that might work, but it’s a plan built on future speculation (much like the 2008 housing crash.) I have to always make a profit on each sale, that’s why Adwords have never worked for me. Even in Google’s own white papers they admit that you can’t make a profit with Adwords and that’s how they intend it.

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    • Iain Dooley

      When you bid on AdWords, you’re competing against other businesses. If those businesses know that they can acquire a customer for $X that is worth a total of $3X profit to them over the next 12 months, and that they have the capital to cover the cost of acquisition until they get payback, then they will adjust their bids accordingly. If you’re trying to make your whole profit on the initial sale then you’ll find it hard to compete against companies taking lifetime customer value into account — that might be why AdWords hasn’t worked for you.

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  11. Jordan Older

    It doesn’t work for anyone who’s trying to make a profit and who isn’t banking on a speculative future (like Amazon and many other companies). It works for companies to try to out-spend their competition. Even Google admits this in their own white paper.

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