How not to Waste your Adwords Budget

DONT WASTE ANOTHER DOLLAR

THE ADWORDS COMPLAINT
If you use AdWords, you probably know this complaint first hand:

We hired an agency that promised a certain number of clicks and visitors every month. They sent the clicks: but our sales are practically the same as before. What a waste of time and money.

When people ask me why their campaigns didnt work, I tell them the problem began with a false assumption. Give me two minutes and Ill clear this up so you never waste your money again.

CLICKS DONT EQUAL SALES
Many people assume their sales would increase if only they could get more traffic to their website. But the fact is: there is little connection between number of paid clicks and sales volume.

Companies that try to sell you click traffic are taking advantage of this common misunderstanding. Heres a story that illustrates:

ALBERTS DILEMMA
Albert is a restaurant owner in San Diego where he serves his signature dish: California Lobster Risotto. Albert is always looking for ways to drum up more business. One day he hired Jennifer, a college student, to go out on the street and hand out flyers: directing passersby into his restaurant.

Albert wanted to pay Jennifer for performance. So he made a deal to pay her a finders fee of $1 for everyone she brought through the door. Albert figured he couldnt go wrong; after all, he only had to pay when she delivered, and delivered, she did! Jennifers charm and good looks helped to bring dozens new of people into Alberts restaurant.

THE GOTCHA
But the problem was that Jennifer didnt care if the people she found were hungry; whether they liked lobster risotto; or even if they had the money to pay for a meal!

In fact, Jennifer discovered it was a lot easier to find people who dont have money, simply because there are more of those kind of people around.

So Albert ended up with a restaurant full of people who had no intention of buying a meal. But Jennifer did her job and she had to be paid.

This is a lot like what happens with agencies that promise to drive website traffic. They may bring visitors to your site but its going to cost you money with no guarantee of sales.

SO WHATS THE SECRET?
The trick to successful pay-per-click is identifying the products worth the cost of advertising. Do this by deciding what percentage of the retail price (or better, percentage of the gross margin) can be earmarked for the sales effort.

Lets think about Albert again. He charges $50 for his famous Lobster Risotto. The profit margin on it is 30%. This means after the cost of food, labor, overhead, etc., Albert makes $15 per meal sold. This is his gross margin. Albert wants $10 of that to go into his pocket (he needs to make a living after all!) but he decides he can spend 1/3 of the gross margin, or $5, on actually selling each meal.

With this knowledge, Albert can go back to Jennifer and, this time, tell her to only bring in people who are hungry and ready to buy a meal. Of course, these people are harder to find but Albert can also pay more for each one of these qualified customers.

So now, instead of paying $1 and getting nothing, Albert will pay $5 and get a $50 sale, from which hell put $10 into his pocket.

THATS ROI
At first glance Jennifers $5 finders fee seems a lot more expensive than the $1 fee Albert used to pay. But when Albert considers that he now gets a $50 sale for each $5 he spends, he understands that its actually a lot more cost effective. He is now getting a positive return on his investment: otherwise known as ROI.

In AdWords, the amount you can spend to make a sale is called the CPA (or, cost per acquisition). When you know your gross margin per product, you can determine what percentage of that will be your target CPA. With your CPA in mind, you now know how much you can bid on your keywords to make a profitable sale.

DO WHAT THE PROS DO
Wouldnt it be better to only pay for the clicks that result in sales? Why pay for traffic that brings no value?

Be like the pros and segment out the high-value traffic from the no-value traffic. Focus on the keyword and ad combinations that result in the highest number of conversions within your target CPA and allocate budget away from those that have poor returns.

So the next time you talk to an agency about managing your AdWords, ask them to explain how they will increase ROI for you. Keep in mind the story of Alberts Lobster and you wont get pinched.