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Can AdWords Make You Money? – It's Your Conversions That Matter!

Sally sells digital greeting cards from her web site. She has received a proposal for an Google AdWords advertising campaign that will cost $ 2,000 and should increase traffic to her web site. (For those of you who are unfamiliar with the term AdWords, it's a way of paying Google to have an advertisement for your business appear on the web pages that Google serves up to people when they conduct a search on a keyword.) Sally wonders if This proposal is worth the money it would cost.

To determine whether or not this proposal would be good for Sally's business, we need some additional information. We need to know what her business nets on each purchase after deducting direct costs related to a sale, (referred to as contribution margin). We also need to know the proportion of visitors to her web site that are likely to make a purchase, (referred to as a conversion rate). This will tell us how much traffic needs to be generated by the advertising campaign to cover its cost. It will also tell us how much Sally can afford to pay for each AdWords click.

Sally nets, (after deducting digital processing costs) about $ 10.00 on each customer's purchase. This means that Sally will need to make 200 sales to cover the $ 2,000 cost of the advertising campaign. (This is computed by dividing the $ 2,000 cost by the $ 10.00 she receives on each sale.) Out of 50 visitors to Sally's web site, about 1 of them eventually purchases. This means that on the average 2% of the visitors to Sally's web site are eventually converted into sales. (This rate of conversion is computed as the 1 purchase divided by the 50 visits.) Incidentally, average conversion rates in retail range between 1.5% and 3.5% and tends to be higher for well established companies that dominate Internet sales.

If only 2% of Sally's visitors eventually purchase, Sally will need to generate traffic of about 10,000 visitors in order to get 200 of them to purchase (This is computed by dividing the 200 required purchases by the 2% conversion rate.) Further, if Sally is going to limit her AdWords campaign expenditures to $ 2,000, this means that she can spend only 20 cents on each click. (This is computed by taking the $ 2,000 cost and dividing it by the required 10,000 visitors.)

Does anyone see a problem here?

Many of us are finding it difficult these days to find keywords that can generate a significant amount of traffic that cost less than $ 1.00. This may be due to a trend in the online market where large retailers are starting to dominate, (as they do in traditional markets) and as a result are bidding up the price of keywords. Or, it might be due to the fact that Sally is simply in a very competitive market where keywords are sought by many, many, competitors. In either case, Sally may find it difficult to find a key word that she can use to make a profit with.

So, whether or not an AdWords campaign can increase sales revenue for your small business depends not only on the traffic to your web site that is generated by the AdWords campaign but the rate at which the traffic is converted into sales. And, whether or not the AdWords campaign is at all feasible, will depend on whether or not you can find a keyword that can generate sufficient traffic for a sufficiently low price.

Before a small business owner spends thousands of dollars on a campaign to increase traffic to her web site, she should examine these factors. She should consider how likely it will be that the traffic that is generated by a particular campaign converts to sales. She should also consider whether the price she will need to pay for the keywords that can generate the required traffic is within her advertising budget. She may find that keywords do not exist that will deliver the kind of traffic and conversions that she needs at a price she can afford to pay. If this is the case, the money she spends will generate a loss instead of a profit.

Unfortunately, rates of conversion which play a key role in predicting sales revenue are not easy to estimate. They will vary depending on the type of people your advertisements attract.

I am a Commerce, Computer and Law graduate. I am running my own IT Company since 1993. I like to Read, explore Hindu Sanskruti, Travelling and Riding/Driving.

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