How to Make More Money in AdWords by Spending Less

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.


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.”
» More blog posts by Iain Dooley


  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.

  2. Sundeep

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

  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?

    • 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 ;)

  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.

    • 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.

  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!

    • 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.

  6. Nate

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

  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).

  8. Naina

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

  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?

    • 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.

  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.

    • 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.

      • Jordan Older

        I see your point about lifetime customer value but I really think that is just delaying business failure out x number of years until they run out of money and realize that they were doing everything wrong. Much like the recent mortgage/banking collapse when people were sold mortgages for houses that they couldn’t afford. The bankers didn’t care because they knew it would be a number of years before the ROI mismatch caught up with them and then when it did catch up to them they knew that the government would pardon them or forgive their losses. It’s just delayed failure due to not making mathematical sense on every sale or purchase. You can also see this in any brick and mortar type business by looking at any typical American downtown retail shop. Just watch them over a period of 10 years and you see that most businesses fail within 5 years and go out of business and then are replaced by another retail shop that goes out of business in 5 years. The owners typically spend a loan from their parents or from investors during those 5-10 years trying to make things work, playing the “life-time value game” that you outline. But the reality is that people just don’t buy that many things from the same vendor. The “life-time value” is a myth invented by someone in advertising trying to convince customers that buying ads that don’t make money is a good idea. Remember banner ads before the dot com bubble burst? It’s the same thing. They don’t work, they don’t give an ROI. The only way to make money is to sell things for a profit. That profit needs to be 5x or 10x your cost so all of your expenses are covered and you really get a profit to put in the bank or re-invest into your business. The big PPC customers like a Godaddy or Bestbuy or Walmart make a profit only by winning market share and by operating bigger and wider scale than the mom and pop’s. They don’t make money on a lifetime value of the customer, they make money on killing competition by having better prices, better selection, better shopping experience, and a huge startup capital. And then still some go out of business: office depot, radio shack, albertsons are somoe big companies that are closing locations and/or going out of business recently and they play the “lifetime value game” trying to make ends meet over the long-term instead of providing the better and cheaper product. Here’s a list of huge companies going out of business in 2014 who spend heavily on PPC and try to outbid their competition hoping they will give up and then to make back their money by repeat sales:

        The real truth is that PPC only works for low competition high value niches and organic SEO always delivers more net profit than PPC.

  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.

  12. Tin

    Gold! And I love the fact that you mentioned about various articles making CRO sound simple.
    One question – let’s say I take those keywords from the search terms report and place them in their own adgroups with exact match types – do I then negative them as exact match from the original adgroup?

    • Iain Dooley

      Hi Tin, yes that’s exactly what I do. When I setup my campaigns, I have 3 campaigns: broad match, phrase match and exact match. The reason I split them up by match type is that it makes budget control simpler; any time I want to do “exploratory” spending, I can open up either broad or phrase, when I’m honing conversions etc. on my site, I might want to narrow spending only to exact match.

      I then have 3 shared negative keyword lists: general exclusions, phrase match and exact match. General exclusions is for stuff that’s definitely not relevant to my business. It’s a mixture of phrase and exact match negative keywords (I don’t really use broad match negative keywords … since a single word broad match negative keyword is identical to a single word phrase match negative keyword, and multi-word broad match negative keywords may have unintended consequences it’s easier to just have the rule “phrase match negative keywords only”). The phrase match negative keyword list is for phrase match keywords that I have added to their own ad group in the phrase match campaign. The exact match negative keyword list is for exact match keywords I have added to my exact match campaign in their own ad group.

      Since I have my campaigns split up by match type, I I can also then see over time that as I add more and more phrase and exact match keywords, and their complementary negative keywords, and as I add keywords to my “general exclusions” list, that I can *no longer* spend on broad match for a given initial keyword research session. Once I get to that point, I can brainstorm an entirely different angle to start exploring.

      This is the system that’s covered in my eBook:


  13. Matias


    I have a campaign running on CPA. Also, I already know my earning per conversion.

    So, lets say…

    Earning per Sale: $100

    So, if I set the CPA bid on $50 and of course it convert at $50, I will have a 100% of return. Invest $50 and I get $50 in “my had”.

    If I decided to pay per CPA bid $70, I will have MUCH sales but less return.

    But now, If I decided to spend $30 per CPA, I will have MORE return on investment but LESS sales.

    Which is the balance on it that I have to pay per CPA to get more profits at the end of the day?

    Higher CPA, more sales, less return. But 10% of Return of a BIG number is better that 200% or return of a very small number.

    Now I understand why my mother said that I had to study at a university!! lolololol

    HOPE all of you understand what I need to know.

    I don´t care how much spend, much or less, but what I obviously want to know if what CPA do I have to set to get more earning at the end of the day.

    I know that there is a limit on quantity to clicks that I can get from Adwords for a specific Search Campaign.

    I have been trying to get always a 100% of investment, so I decided to pay $50 conversion. $100 sales – $50 advertising cost= $50

    Adwords offers any tool for it? something that I am messing?

    Thanks to all in advance.


    • Iain Dooley

      Hi Mat, There are 2 issues here:

      1) How accurately are you communicating the value of each conversion back to AdWords? If you’re just communicating initial sale value, then you might find that in fact you could be bidding much higher, because your lifetime customer value is higher. In order to determine your lifetime customer value, you can use Cohort Analysis which I wrote about here:

      If you’re using Cohort Analysis, you could, in addition to splitting up cohorts by month of first purchase, create individual cohorts for month of first purchase for each of your most popular keywords. You can then look at the ratio of first purchase value to lifetime customer value on average for each cohort and if you find a correlation (ie. people who make big purchases at first, tend to continue making big purchases) then you can simply multiple your conversion value by this multiple, so that you have a more accurate conversion value based on lifetime customer value (LTV). This assumes a variable purchase scenario (eg. ecommerce) — the same principle applies but is simpler for things like SaaS or other subscription revenue models.

      2) The second issue is when you would ever lose money on AdWords spend (even taking into account lifetime customer value). Here, the equation is based on opportunity cost. If you would be losing market share to a competitor and allowing a competitor to gain a foothold by not being #1 for a few keywords, then you could lose money on some keywords in order to send them broke while they try and figure out their marketing. Alternatively there might be a particular market opportunity that you want to capitalise on, or a need to grow your customer based before selling the business in which case the increase in sale price might offset the advertising loss. These types of things are classified as “opportunity cost”. It’s pretty hard to calculate opportunity costs in some cases, but the general idea is that there is a cost (or loss of potential value) of not having a customer that exceeds the loss you would make to acquire that customer.

      Be careful with opportunity costs :)


      • Matias

        Lain. Thanks for you soon reply.

        Lets say that every 10 leads get 1 Sale. I have more that 200 sales, that means 2000 Leads. The customer value is very accurate.

        I know that if I spend LESS money per CPA, I have the RISK of shoutdown keywords that need a min bid to make them run.

        From other point, in this case suppose that I DONT have competitors. I understand what you day regarding competitor, but in this case I dont have it.

        What do you suggest me to invest per CPA to finally get more money?

        Tell me a magic formula!!