- By Eddie O' Driscoll
- on November 15, 2012
Does AdWords Really Work?
The answer to this question depends on three metrics. These are the price paid per click, conversion rates and gross profit per conversion. If a business does not have a competitive advantage in one of these three areas, it cannot expect to make money from AdWords over the long run. Let’s look at each metric individually to explain this in more detail.
1.Price paid per click (Quality Score):
If you pay the same price per click and have the same conversion rates as your competitors, then your cost per acquisition is the same as your competitors. If your gross profit per conversion exceeds this cost per acquisition, then this form of advertising increases the profitability of your business. If this is the case, it would also increase your competitor’s profitability. A logical company will look to buy as many clicks as possible in this situation. This leads to competitors increasing their max CPC bid in order to win clicks. In response, you will increase your bid to win back clicks. This will continue to happen until profits are driven to zero with Google being the only winner. However, the above assumes that max CPC bid is the only means of improving ranks. This is not true. In our document “what determines cost per click” we outline the role of quality score in determining cost per click. So, a company that can attain a higher quality score vis-à-vis competitors can pay a lower amount for the same clicks. This higher quality score means that this company has to pay less to achieve a given rank and so it’s cost per acquisition at a given rank will be lower and so can outperform the competition. Quality score is a genuine form of competitive advantage in AdWords.
2. Conversion rates versus competitors
Assuming quality scores and so CPC are the same as the competition and so is your gross profit per sale, then your conversion rate is the only means of creating competitive advantage. If you can achieve higher conversion rates on your site than your competitors can on theirs, then your cost per acquisition associated with the same cost per click is lower than theirs. This competitive advantage means that you can outperform them. If not, again bids will continue to be raised until profits are driven to zero.
3. Gross profit per sale versus competitors.
If your cost per click and conversion rate is the same as your competition then your CPA is the same as theirs. If your gross contribution per sale is the same as them, then you will both continue to bid until cost per acquisition equates to contribution per sale. To bid any more would be illogical, any less would leave money on the table. Again, the only winner is Google. However, if you make more profit per sale than does your competitor, you can tolerate a higher cost per acquisition than they can so you can outbid and so outperform them.
So, the answer is that AdWords can and does work for those companies that can identify some competitive advantage vis-à-vis their competition in one or more of the above areas. They say in poker that if you don’t know who the fool is, then you’re the fool; if you don’t know in which one of the above metrics you can outperform your competition but continue to use AdWords, this may apply to you! As always when speaking about AdWords we advise to use it “as part of a balanced marketing plan” and not to over-rely on it. It should be used in conjunction with social media and SEO.
written by Eddie O’ Driscoll