Do PPC ads work? Is the cost of advertising on Google and other pay-per-click networks too high for your small business? Maybe not. Here are factors that will help you determine if advertising on search engines could be cost-effective for your company.
One of the problems small businesses struggle with when they use Google Ads (formerly called Google AdWords) is how much it costs to bid on keywords and phrases that are associated with what they sell. But despite the cost, many businesses find that advertising on Google Ads is beneficial. Here’s what you need to know to decide if your business might benefit, too.
What are keywords and why are they important?
The key to making online advertising (and for that matter, search engine optimization, too) work is having a good understanding of keywords.
Keywords and keyword phrases are the words people type into the search engine when they are searching for something. A person who wants pizza for supper might search for “pizza,” or “pizza delivery,” for instance. While someone who wants to look for a new chandelier might use the search term “lighting store” if they want to find a local store to look at chandeliers. And someone who wants to do a mailing for their business might search for “direct mail service.”
Each time someone searches Google (or any search engine) for a term or phrase, the search engine displays pages of results called SERPs (an acronym for Search Engine Result Pages). For popular queries on Google, the SERPs contain some mixture of advertising, answer boxes or featured snippets, related questions (“People Also Ask”), images, and listings of web pages that Google found in its index that relate to what the searcher was looking for. The advertisements are marked as ads. The web page listings (free listings) are called “organic listings.”
One of the factors Google uses to determine if a page relates to a search is whether it contains keyword and/or synonyms that match or answer what the searcher was trying to find.
The paid ads that match the search term are usually placed at the top of the SERP pages and sometimes at the bottom of the page as well. The Answer Box and any related questions boxes usually appear below the ads. The organic listings start below the answer boxes, arranged in order of relevance to the search term.
Because of all those items that Google displays before the first organic listing, even top-ranking organic listings are often pushed far down the search results page. Good web pages that aren’t ranked at the very top get pushed to page 2, 3, or subsequent search result pages. (Other search engines work in a similar way).
Most people using a search engine don’t look much beyond page one of search results. In fact, research shows that the 9th and 10th organic listings on page one of Google have a clickthrough rate of only 2%. The bottom line: if your site doesn’t show up on the first page of search results, few people will find it.
How Do PPC Ads Work?
Pay per click ads give businesses the opportunity to pay to get listed on page 1 of search. In very basic terms, PPC advertising works like this:
When your small business buys PPC ads on Google and other search engines, you are participating in a type of auction. You create a short ad for what you sell and specify a list of keywords for which you would like that ad to appear. These keywords should be the words your customers are most likely to search for when they want to buy what you sell.
Since there are usually many companies that want to show up for the same keywords, you have to bid on your keywords. The bids indicate the maximum amount you are willing to pay for each click on your ad when it appears for the keyword.
Google chooses which ad appears in which spot on the results page based on a combination of factors. The bid price for each keyword is one of the most important, but other factors including the relevancy of the ad to the search query, which ad spot your ad is placed in, the click-through rate on the ad, and the landing page for the ad (ie, what page people reach when they click on the ad), come into play as well.
If you bid high enough to make your ad show up, you will be charged each time someone clicks on your ad. The maximum you might be charged per click is the amount you bid for the keyword, but you could be charged less. If your keyword bid is too low, your ad may never show up.
How Much Do Keywords Cost?
A WordStream Benchmark report for 2018 shows that the average cost per click (CPC) across all industries for the search network is $2.69. But the actual cost varies a lot by industry and by keywords within the industry. The WordStream Benchmark report shows, for instance, that keywords in the legal industry average more than $6 a click, while e-commerce clicks average $1.16. In general, keywords that are associated with expensive products or services can be quite pricey. For instance, the keyword tool, Keywords Everywhere showed that a business bidding on the term “kitchen remodeling” might have to bid close to $10 a click at the time this article was written. Meanwhile, a local bakery that wants to show up for the term “bakery” and their city might have to bid $1 or less.
Does It Pay to Advertise When the Cost Per Click is High?
What small businesses forget when looking at the cost of their PPC ads, is that the way to benefit from advertising (in any form) isn’t by selling one product one time to each customer. It’s by winning the customer and getting repeat sales over a period of time. Those repeat sales may be additional purchases of the original product or additional products you sell to the same customer.
That’s why the cost per click doesn’t, by itself, determine the likely profitability of PPC advertising. Other criteria have to be considered. For starters, not everyone who clicks on an ad becomes a customer. In fact, the percent of people who make a purchase after clicking on an ad is usually quite low. The WordStream Benchmark report shows that average conversion rates vary by industry from a low of about 1.96% a high of 9.6%, but that the average conversion rate across all industries is only 3.75%
If 500 people click on your ad, and you have a conversion rate of 3.75%, that means you’ll have between 18 and 19 people make a purchase. Whether or not that ad is profitable will depend on the dollar amount of those sales, how much profit you make on the sale after you account for your product cost, labor, and other expenses, and ultimately, how many more purchases the customer makes in the future (the lifetime value of the customer.)
If you’re paying $2.69 a click and 500 people click, your ad cost will be $1345. If you have 19 people make a purchase (ie, you have 19 conversions), your cost per conversion will be $1345/19 = $70. If you are selling just one $30 product and people don’t need to buy more than one of the item, you lose money on the ad.
However, if the average customer buys five of those $30 items at a time (making your average order price $150), and if your product cost and related expenses aren’t too high, you’re likely to make money on the ad. You’ll make even more if the people who bought the item in quantity return in the future to make repeat purchases.
The bottom line here: If you only have one product and can only sell that one product once to each customer, pay-per-click may not work for you unless the product or service commands a premium price. But if your customers come back to buy from you multiple times, you need to consider what the value of those repeat sales are to be able to make good decisions about how much to spend on pay-per-click and other advertising.
