Should Your Business Pay to Advertise on AdWords?
Forget the critics. If you can drive desired actions from potential customers on your website at the right price, paying for traffic is a necessity for growth. Below you will discover details surrounding one of the most common questions in regards to AdWords advertising.
Should I be advertising on AdWords? This is increasingly important for start-ups. Using the economics of your business, conversion rates of your online advertising channels and sales funnel, one can determine the maximum you can spend to acquire a customer via AdWords. This can also be applied to other performance media. If you’re unfamiliar with the exact numbers for these metrics, utilising ballpark numbers will suit.
First off, let’s focus on finding out what a customer is worth to your business. Do they make one-off payments or are they a repeat customer making multiple payments over time? This metric is called Customer Lifetime Value (LTV). A simple formula below:
Simple LTV equation:
Average Revenue per Customer = Yearly Revenue/Yearly Customer Count
e.g A gym makes $360 average revenue per customer
Yearly Revenue $36,000 / 100 Customers for the year
N.B There are other sophisticated LTV equations to provide more accurate figures but for the purpose of this article, the simple equation will suffice.
By working out the average LTV of a customer, this enables you to estimate the maximum acquisition cost of a new customer. Using the estimates from the formulas above, you must spend less than your cost-per-acquisition to acquire new customers. Spending more than your LTV, you are more than likely to be losing money from your clickable media.
Next we’ll explore your maximum cost-per-conversion objectives within your AdWords campaign. Taking into consideration your business-type, this is how you could arrive at your LTV. In the instance of a service-based business, your conversion rate of leads to an actual paying customer lay in the realms of 20%. Using this number we now know what we can afford to pay:
Average Revenue per Customer = Maximum Customer Acquisition Cost * Conversion Rate
e.g A maximum of $72 per conversion, using the numbers from the gym.
$72 = $360 * 20%
Now you’ve got a broad cost-per-conversion goal to work towards, an absolute must in search marketing to ensure your conversions are profitable. More complex numbers stem from taking into account things like churn rates, how many months you can afford to pay off the acquisition cost and more. If this is a cost you can afford, you should be advertising on AdWords.
Acquire more customers with search – at the right price.
Written by Mark McDowell — Performance Media Specialist at WME.