Adwords example

How can you use adwords? This example shows the cost benefits of using adwords.

Adwords example

If you have a high value product with a good margin in a niche market you should almost certainly be using adwords - even though your website may rank no. 1 in the search engines, you can double your presence on the search engine page for a few cents per click. But ...

What if you are a small retailer with relatively low margins - can it work for you?

There is one rule about all advertising and that is that it must pay for itself. The cost of producing the adverts and running them must be outweighed by the increase in profitability which derive from them.

How much are you prepared to pay to get each customer will of depend on how much that customer is worth to you.

florist shop

Small Retailer

Scenario: A florists shop based in Browns Bay.

Adwords: Adverts are displayed whenever the word Florist or Flower Shop is entered along with a local area (e.g Florist Browns Bay, Flower Shop Long Bay etc).

Conversion rate: 2%  (on average there will be 50 clicks before a sale is made)

Average cost per click: 20 cents (the word florist would cost considerably more so the area has been added which brings the cost down) 

So calculating the cost a getting the sale is 50 clicks at 20 cents to get one sale = $10

If the usual margin is 20% and the average sale price is $50, the $10 spent on advertising on adwords means that you have hit break even.

At this point you are thinking - "this is just a break even point, I want to make money!" . OK, but lets consider the future -

So just before Christmas you email them with an offer on a couple of Christmas Bouquets.  They have already used you, they know that you provided good service and they trust you.  So when your email arrives, they are quite likely to order again from you.

Same for Valentines day, Easter and Mothers' Day. Make it easy for the customer to buy and your emails will bring in profitable business. Of course if you have asked for the visitor's Spouse birthday and his/her parents, there is further opportunity.....

Just keep monitoring expenditure against sales to ensure that margins aren't slipping.

Lifetime value of a customer

This is basically how much profit are you going to derive from your average customer over a lifetime.  The florist shop might expect an average customer to buy once a year for 5 years.  Some will buy once only, others may buy a lot more.  But if this average is correct, the theoretical turnover from that customer will be 5 x $50 = $250 and at a 20% margin the profit will be $50 over the 5 years. 

If you know (and in the case of the florist it might be quite hard) what the profit will be for every extra customer you get onto your database, how much would you be prepared to pay to get them.  $10, $20 or $30? 

Being cautious, breaking even on the first sale seems a good idea with a view to reaping the rewards later on. 

But there will be businesses, perhaps mortgages, where securing the customer may be fine to make a loss in the first year because over the term of the mortgage it becomes profitable.  


Should everyone use adwords?

No. For some business areas it is just too expensive to justify. If there is a lot of competition for the key words and phrases, it will cost a lot per click and the maths just will not work out.

What is Adsense?

Google offers two different places where you can advertise your products. One is the Search engines. You will also have been to other websites where there are sections labeled Ads by Google and is known by Google as the content network or Adsense.

If you allow Google to put Adsense adverts on your website, they pay you each time there is a click on the advert. This used to be a good way of earning revenue but it is much harder now, besides which you really want visitors to stay on your website.

Adsense can be useful if you have a product that has general interest . The cost per click, although not so well targeted, can be much cheaper for given key words. The links work in the same way as they do on the search engines. It is possible to select websites on which you want to display your adsense adverts but they need to be specified individually - and that takes a long time. Interestingly though you could get your advert appearing on a competitors website if they allow adverts.


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