Making online advertising pay

If numbers make your eyes glaze over or head spin, you might want to skim over this section. But for the rest, this section explains how you can use one of online advertising’s biggest advantages — the fact that everything is trackable and measurable — to answer two thorny questions: Does my advertising pay? And how can I get more from every ad dollar I spend?

What pay per click (PPC) advertising costs

What you pay — the bid price — depends on competition for the keywords, so much of the art of PPC marketing is buying keywords at the best price.

Keyword research tools, like the free Google AdWords Keyword Tool we used earlier for keyword research, will tell you useful information such as the number of searches for that term, the likely cost of each click, and the amount of competition for those keywords. They’ll also give you an indication of the price other bidders are paying.

Prices typically range from US$1 to US$5 per click but can run much higher for very popular terms. They will vary based on both the keyword and the position your ad appears when several advertisers have bid for the same keyword.

As with search results pages, if your link doesn’t appear in the top two or three, you’re unlikely to see much traffic from it, giving you an incentive to outbid other advertisers.

The two factors that drive your overall advertising cost

There are two key factors that drive the overall cost of a PPC ad campaign:

The cost of a click – how much you pay each time your ad is clicked
The conversion rate – the percentage of those visitors who take up your offer

By taking these two factors into account when you analyse your sales results, you can work out the total cost per order for your advertising and calculate your profit or loss from this advertising.

The low value of most ebooks makes the economics of paid advertising difficult. It’s most useful for higher priced specialized ebooks and for situations where an author or publisher can earn income from repeat sales.

While PPC advertising is most frequently associated with search engine advertising, the method is common with many other types of online advertising, including social media advertising as we’ll see when we look at Facebook.

How to analyze the profitability of a PPC campaign

Online advertising is the most measurable and accountable form of advertising. This helps to fix a problem that has plagued advertisers since long before John Wanamaker’s famous remark: How to spend more on what works, and less on what doesn’t.

For anyone who’s familiar with direct marketing, the calculations and the terminology will be familiar. The payback from doing it can be very big indeed. So, if you’re up to the challenge, take a look at the simple worked example below.

Worked example: How to analyze the profitability of a PPC campaign

Let’s get your head spinning with an example that shows you how to calculate your profit or loss — and what you can do to improve it.

Assume we are selling a $10 ebook using PPC advertising. The ad takes visitors to our site where they can buy the ebook. We find that on average 10 per cent of those visitors end up buying our ebook.

How much has our advertising cost?
Was this exercise profitable?
Which variables must I alter — and by how much — to make it profitable?

Financial Analysis of a Pay Per Click (PPC) Advertising Campaign
Number of clicks	100	Number of search users who click your ad
Cost per click	$2	Cost each time an ad is clicked on
Total advertising cost	$200	Number of clicks x Cost per click
Conversion rate	10%	Assume 10% of visitors accept the offer on your site
Number of conversions	10	Number of clicks x Conversion rate
Total cost per order	$20	Total ad cost divided by Number of conversions
Average selling price	$10	Assume your ebook sells for $10 on average
Profit (Loss) per sale	($10)	You’ve lost $10 on each order!

Not a great result on the face of it.

This simple example uses many of the basic metrics that online advertisers track. But even a campaign that appears to have failed offers valuable insights. It shows that we can break even by making some changes and gives us a framework to show exactly how much to change each element of a campaign to meet our goal.

How to improve the success of a PPC advertising campaign

We can use the results of our analysis to improve our campaign — and the good thing about online advertising is that you can do this almost instantly, and frequently. Bad advertising can be quickly spotted and corrected.

Five ways to improve a PPC advertising strategy

Here are five things you can do, individually or in combination, to improve a PPC advertising strategy.

#1. Increase the average order value

You can increase the average order value by raising the selling price of the ebook; or by getting the buyer to buy more items in the same order, for example additional related titles or an update service.

#2. Improve the conversion rate

This is a key area to target since, if you can raise the conversion rate from, say, 10% to 20%, you’ll halve the advertising cost. (Re-run the numbers in the worksheet above to see.) One of the most effective ways to improve conversions is to use a landing page on your website. Instead of sending visitors from your PPC ad to your website home page or to the standard product page, send them to a specially-written page that ties into the PPC ad copy, explaining and selling your special offer.

#3. Increase the lifetime value of the customer

Often, you can justify losing money on the first sale because the goal is to acquire a customer who will do business with you over and over again. In fact, a common strategy is to make the first order free, referred to as a freemium. This will increase your conversion rate, meaning you’ll get more people on your database. Once they’ve agreed to receive your emails, you can go back regularly, at no further cost, with new offers.

#4. Reduce the keywords cost

Rather than buying obvious, high demand keywords which will have lots of bidders to drive up the price, you can put your campaign together with a range of more specific phrases which will cost less because they attract fewer bids. Provided they are relevant, you’ll still receive well-targeted traffic.

#5. Re-run, measure results and try alternatives

The good thing about PPC advertising is that it’s easy to experiment – you can quickly change ad copy, keywords, even landing pages. Each time you make a change, you should measure the results to see whether it improves performance. Only make a single change each time so you know what causes results to improve or worsen.

VIDEO: Conversion tracking

One of the most powerful features of Google’s Analytics program is conversion tracking. It takes you beyond measuring how many users clicked your ad to see how many converted — that is, completed the action you set such as making a purchase or signing up for a newsletter — and what your return on investment was from the campaign.

This video from Google explains how conversion tracking works and how you can use it to improve your online marketing.

VIDEO: View a video from Google (9:04) explaining how conversion tracking works

http://www.youtube.com/watch?v=wkt7hkoF9qE&feature=player_embedded