Why Pay Per Click Advertising Works – Here’s A Hypothetical Case

Why Pay Per Click Advertising Works – Here’s A Hypothetical Case

How Pay Per Click Advertising Is Measurable & Profitable

As a graduate student, I took a marketing class that was built on the foundations of traditional marketing (print, direct mail, various distribution channels).  However this class dove deeper into the new wave of marketing (search, internet, social media, email).  The conversation became healthy debates in class that ended with these new forms of marketing becoming part of the regular lexicon of chief marketing officers around the world.  Social media will no longer be its own subcategory.

Well, the same hold true for search engine marketing.  Studies show that search marketing accounts for half of the online revenues and sales that take place.  If you think about, this phenomena should come as no surprise.  Consumers go online to search for information discovery or purchase (I may be missing something else) but that’s the fundamental basis behind a search.  Studies have shown that while $39 billion are earned through online advertising a year, $19 billion comes through search advertising.  So what does this mean for small and medium size businesses?  It means everything to how you market and promote your business in this era.

Instead of going through the benefits of search engine marketing, I decided to put a case study to show you the methodology behind a profitable campaign.  Let’s say you own a residential carpet cleaning company.  You determine that your average customer value is $450 a year for each customer you pick up.  If you determine that you need to pursue a new avenue of marketing, in this case it’s search engine marketing (pay per click), you have some key assumptions to make at this stage of the process.

The first decision is how many calls can you expect to get from the number of people who view your advertisement on Google, Bing, or Yahoo.  Let’s say your phone call rate is 5%, meaning for every 20 people who click on your advertisement and subsequently view your website for your cleaning services, 1 person will call you.  I know, it is a conservative figure but a reasonable one at that.  Afterward, we have to determine your close rate, meaning once you get a potential customer on the phone what is the likelihood you’ll be able to win their business or better yet how many people have to call you in order for you to win one client.  Let’s assume you can win 1 client for every 10 people that call you (10% close rate).  Once again, I know it’s conservative, however it is necessary for this analysis.  This effectively means that for every 200 people that click on your ad, you will win 1 client.

Now this is when the analysis tells a good story.  If you require a 50% margin on the cost for each time an individual clicks on your ad, this effective means that your breakeven cost per click is $2.25 and thus your TARGET cost per click is $1.13 (rounded up).  To ensure my numbers are correct, $2.25 a click times 200 people who click on your ad, which translates into 1 client amounts to $450 (which is the value of each client you pick up). Once again, this is your total breakeven point.

After this, small business owners just have to figure out what budget they can spend towards a pay per click campaign.  For hypothetical purposes, let’s assume $100 a day or $3,000 a month.  If we are assuming a 50% profit margin, you can expect to earn $6,000 a month in revenues.  Again, this assumes a maxing out of the number of clicks a campaign receives each day, which part of what Que Commerce and other search engine marketing companies engage in.

The beauty of this back of the napkin analysis is four fold.  First, it allows small business owners to measure their market campaign based on return on investment.  That can be challenging to do with other forms of marketing such as print.  Second, a search engine marketing campaign are laser targeted.  The only time a small business gets charged a click is when an interested party clicks on your ad.  Third, total revenues are a direct reflection of your total budget.  If for example there were many many more potential clicks out there, and you doubled your budget your costs would then be $6,000 yet your revenues would be $12,000.  Finally, consumers are becoming more and more sophisticated and utilizing the internet more for research, reviews, and purchases.

Now there are pitfalls and challenges to consider.  First, competition is real and small businesses do have to compete for clicks, which can ultimately drive up the cost of clicks for a particular keyword or keyword phrase an individual is searching on.  Second, consumer behavior is rarely static.  It changes regularly but not in huge swings.  They are more so trends that occur.  Third, nothing is perfect and exact.  These numbers presented were hypothetical targets.  What if competitors are bidding $1.50 per click?  That means your profit margins will decrease.  As a business owner, are you willing to shoot for 20%, 30% profit margins?  That is where a search engine marketing organization comes in.  These companies help companies define customer objectives, implement a search engine marketing campaign, and maximize the campaign in order to create the optimal cost per click that is profitable and sensible for that business.

As small businesses become more aware of the opportunities in pay per click advertising, it is critical that you at minimum explore the effects and benefits of incorporating search engine marketing into your overall marketing strategy.  You do not want to be the one to miss the boat.  Be ahead of the curve and determine if this strategy fits into your overall budget.  If so, it is something you should explore closely to maximize the value of your business.

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