Want to know the one, most critical factor that will determine the success or failure of your Google AdWords campaign?
I’ll give you a hint: It has nothing to do with copywriting, quality scores, landing page optimization, or any fancy automation or research tools. Don’t get me wrong, those are all important, but they aren’t the most critical factor. It’s much more simple than that.
Too many people make online advertising more complicated than it really needs to be. In my previous article, Congruence = Secret To Google AdWords Success, I talked about what I call “Campaign Tunnel Vision” which is when you focus too closely on the minute details of managing an ad campaign. In other words, you dig too deep into campaign tips and tricks that you miss the forest from the trees.
At the end of the day, the success or failure of every ad campaign you run will depend on knowing your numbers. Calculating your specific business numbers should be the very first (and most crucial) step to set up a profitable Google AdWords campaign. Yet, many businesses skip this step, and instead, move hastily to setting up the main components of the campaign like keywords, ads, and landing pages.
That’s like buying a new couch without first taking the time to measure your living room to see if it’ll fit. Sure, you could get lucky, but it’s going to be painful if you find out the couch is too big! And that’s what can happen if you rush into advertising before knowing your numbers. You can end up advertising on keywords that, no matter how much you optimize, will simply never allow you to hit your business goals.
How Much Can You Afford to Pay?
When calculating your business numbers, one of the most important questions you to answer is, “How much can you afford to pay PER CLICK to generate one customer?” Can you afford to pay $1, $5, or $10 per click? That’s obviously an important question to answer so you know how much you can bid in AdWords.
Keep in mind this number is going to be different for every business. Just because you’re a dentist, and you know other dentists are paying $5 per click, doesn’t mean you can afford to pay that much. It depends on many factors that are not readily apparent when you do competitive research.
For example, in order to figure out how much you can pay per click, you need to first answer the following questions:
- What is your 90-day profit per customer?
- What is your target advertising profit margin?
- On average, how many phone call leads convert to sales?
- On average, how many calls can you expect to receive from your website visitors each month?
Based on the answers to those questions, you can calculate a rough estimate for your maximum cost per click. Let’s take a look at an example.
Le’s say your average 90-day profit per customer is $1,250. To arrive at this number you need to take into account the initial profit per sale, average repeat sales, upsells and cross-sells to more products or services, and even referrals.
Next, let’s say your target ad profit margin is 25%. So if you invest $1,000 into AdWords, then you want to generate $250 in profit. Based on historical data, you may find that you convert about 10% of all phone call leads into customers and you expect to receive about 5 phone calls per 100 visitors to your website.
The formula to calculate your maximum cost per click is: $1,250 x (1-25%) x 10% x 5%
Once you do the math, then you’ll see your maximum cost per click, or CPC, is $4.69. That means you can pay up to $4.69 to generate a visitor to your website. If you pay more, then you’ll most likely have a low profit margin or even worse, lose money on the ad campaign.
See how powerful it is to know your numbers? Now you can identify the keywords you have confidence will be profitable, and the keywords that will most likely never work for your particular business. This simple exercise will save you from a lot of pain and frustration… so don’t skip this important step the next time you set up an ad campaign!