Pay-Per-Click Advertising: An Overview
When it comes to pay-per-click (PPC) advertising, my motto is to distrust anyone that tells me that I won’t be charged unless someone clicks on my ad. Why? Because a lot of people with no intention of buying anything will click on my ad…Nevertheless, those selling PPC ads love to use this line to reassure me that the money that I’m about to spend will be worth while.
In this post, I collectively refer to those selling PPC advertising as “PPC vendors.”
While PPC advertising comes in many forms, the two most prominent types are:
- Paid search campaigns where you bid on certain keywords and
- Comparison Shopping Engines (CSEs)
Paid search campaigns take place in search engines such as Google or Bing. In these campaigns, you bid on certain keywords and when somebody searches for those keywords, your ads may show up. If a user clicks on one of your ads, they are taken to a landing page on your website. Each time a different user clicks on an ad, you are charged a pay-per-click fee.
Comparison shopping engines are websites to which many shoppers go when they want to find the best deals on a product. To advertise on a CSE, you submit your products to the comparison shopping engines of your choice. They then showcase your products along with similar merchants selling the same products. Shoppers then look at the competing deals and click on one or more of the deals presented by the CSEs. Just like with paid search campaigns, each time a different user clicks on your ad, you are charged a pay-per-click fee. Although hundreds of comparison shopping engines exist today, a few examples include Nextag, Shopping.com, Shopzilla and Pricegrabber, just to name a few.
After having spent (and wasted) much more than I care to admit, my experience with PPC advertising has been mixed – but one thing is for certain: throughout the years I noticed that a lot of people clicked on my ads and those ads cost me a lot of money.
I’m not making an argument for or against PPC advertising. All I’m saying is that you need to make an informed business decision before you embark on this journey called pay-per-click advertising. The more clicks your campaign gets, the more money the PPC vendors get. Therefore, make sure that those clicks result in something worthwhile. Structure your ads so your campaign achieves a positive return on your investment (ROI). For example, If you’re spending $100 on PPC advertising to get $50 in sales, then you’re not doing so well. You were probably better off not getting those sales because for every dollar that was generated, you spent two dollars on advertising.
Define Your Desired “Action” And How Much It Is Worth
PPC campaigns should be designed very carefully and monitored on a periodic basis. If you don’t, you can wake up in the morning and find yourself having spent thousands of dollars and not have much to show for it. Here are a few tips to help you along your journey.
Once you decide to start a pay-per-click campaign, make sure you define your goals very clearly and in detail. Be clear about what you are trying to achieve with the campaign and how much it is worth. In other words, define an “Action” that needs to take place once someone clicks on your ad. Your goal is to convert as many clicks as possible into an Action. That Action can be defined as anything, as long as it is defined. For example, if you are an online retailer, the Action is probably to achieve a sale. If you are a consulting firm, your Action may be achieved when someone downloads your whitepaper. It is up to you to decide what that Action is.
Having defined your Action, you then decide how much that Action is worth. Here is a simple example: Let’s say you’re an online retailer and you’re selling a particular product for $100 that cost you $70.00. That means that you’re making a $30 profit on that product. In a PPC campaign, you need to make sure that your cost to convert a click into your Action is less than $30. This is referred to as your “Cost per Conversion” and is defined by taking the total amount you spent on advertising divided by how many conversions your campaign was able to achieve. If your cost per conversion is more than $30, then you’re losing out. Why? Because if you’re paying more than $30 per conversion, then you’re losing money on every widget that you sell. Your campaign is achieving a negative ROI. Not a smart move.
In general, it’s a good idea to define the meaning of success for your PPC campaign. In other words, calculate what a successful PPC campaign is worth in terms of your ROI.
Times When It May Be Worthwhile to Spend A Little Extra On PPC Advertising
There are times when you can justify having a negative ROI for a PPC campaign. For instance, even if the cost per conversion for a particular campaign was higher than the profit you made on a widget, the customers you gained from that PPC campaign have an intrinsic value. You can now market to them through emails or social networking and hope that they make repeat purchases. If some of them do make repeat purchases, then in those circumstances the “lifetime value” of that repeat customer goes up. However, unless you are really clear on calculating the lifetime value of your customers, then you shouldn’t even consider this as a reason to tolerate negative ROI.
Another use for PPC advertising is what’s called by marketers as “branding.” That’s when you are trying to build your brand’s awareness among your target audience. Several well-known brands spend outrageous sums of money on PPC advertising. For example, if you’re searching for a new flat screen TV, then a popular TV manufacturer may find it worthwhile to bid on keywords you would use when you’re doing research on flat screen TVs. For the TV manufacturer, it’s worth it to capture your attention through PPC advertising early on in the buying cycle. The sooner they can get you to think about their brand, the more likely you will be to buy one of their TV models. However, whether you’re a multi-billion dolar TV manufacturer or just a small business, it’s still a good idea to define your PPC branding campaign through the framework of the Action you are trying to achieve. In most cases, I’m not sure if PPC advertising for branding purposes is a good use of money for a small business. Unless you’re a big brand, then this type of branding effort can be very ineffective and very costly.
The PPC Vendors’ Perspective
From the PPC vendors perspective, the higher the click-through-rate (the more clicks that your ad achieves), the more effective your ad was at attracting a potential customer. What happens after the click isn’t as relevant to a PPC vendor. As far as they are concerned, if they were able to give you a tool to design a nice looking ad and they were able to generate a lot of traffic to your ad and a lot of people clicked on your ad, then they did their job effectively.
To be fair to the PPC vendors, they do provide a platform where you can advertise your goods or services to a very large audience. The reach you can achieve with PPC advertising is much wider than ever before for a small business. In the past, the best that a small business could afford was to advertise in the Yellow Pages and hope that somebody in their neighborhood sees their ad. Today, with PPC advertising, you can literally advertise worldwide for much less than it cost in the past to advertise locally.
PPC vendors never promise that they can help you sell more. All they promise is that they can provide an effective platform to achieve a high click-through-rate (CTR) through the use of a well designed ad. The more clicks you have, the more likely it is that somebody will end up purchasing something. However, the PPC vendors have no control over what your landing pages look like or how popular your products are. It is up to you to make sure your website is presentable and that you’re offering products or services that people actually want.
PPC advertising can be a very effective advertising channel for your small business if it is designed correctly and monitored often. If it is not, then PPC advertising can become a huge expense that eats up all of your profits. When planning your PPC campaign, keep in mind that your definition of success and the PPC vendors’ definition of success are slightly at odds. Pay-per-click vendors define success by click-through-rate (CTR) – the percentage of users that click on your ad. However, a small business owner should define success by conversion rate – the percentage of clicks that result in your desired Action.