NUMBERS YOU CAN LIVE BY
by: Cary Christian

I participated in a marketing survey last week. The survey was run in a forum format which made it possible to see everyone else's responses to the questions.

The respondents were all small business people, much like most of you, and most seemed to be running successful businesses. There were many good ideas set forth and many interesting answers to questions that dealt with how individual companies deal with online marketing mediums.

There was one question about the maximum amount people would bid for cost per click advertising, such as Pay-Per-Click search engines. Some of the answers floored me!

Quite a few of the respondents answered that they would never bid more than 10 cents or 25 cents on keywords or keyword phrases. It made me wonder how many other people set these types of limits on themselves. More specifically, it made me wonder how many of YOU set these types of limits.


THE PROBLEM

The people who responded to this question by quoting a limit on what they would bid are looking at the issue from the standpoint of "100 clicks will cost me $10" or "100 clicks will cost me $25." By itself, this information is meaningless. People who approach the issue in this manner might or might not be saving money, but they are very likely missing opportunities.


THE PROPER APPROACH

A marketer needs to answer three other questions before considering whether 100 clicks is worth $10, $25 or even $100. The three questions are:

1. How many TARGETED visitors do I need to attract to the sales page for this product to make one sale?

2. What is my gross profit margin on this product before advertising costs?

3. What profit after advertising costs will I be satisfied with?

With the answers to those three questions there is no guesswork to what the bid will be. It will become readily apparent and there will be no need to set artificial limits.


AN EXAMPLE

Let's say you sell product A for $100. It costs you $50 to buy it from your supplier or to manufacture it yourself. That leaves you a gross profit before advertising of $50. You want to make at least $25 on this product after advertising.

You sell product B for $75. It is an information product that costs you nothing to produce. You want to make at least $40 on this product after advertising.

You have tracked the visitors to your sales pages for these products and have found that you need 100 targeted visitors to make one sale of product A and only 50 targeted visitors to make one sale of product B.

What will your bids be for each product?

PRODUCT A

You know it will take 100 visitors to make a sale. Take your gross profit of $50 and subtract the minimum profit you will accept after advertising of $25 and you know you have $25 per sale to spend on advertising. $25 divided by 100 visitors gives you a maximum bid of 25 cents for product A.

PRODUCT B

You know it will take 50 visitors to make a sale. Take your gross profit of $75 and subtract the minimum profit you will accept after advertising of $40 and you know you have $35 per sale to spend on advertising. $35 divided by 50 visitors gives you a maximum bid of 70 cents for product B.

Perform this analysis on all the products you sell using pay-per-click marketing resources and you will never over or under bid for any product.


MATCHING THE BIDS TO KEYWORDS

Once you have your bids nailed down, you need to consider where this bid puts you in the rankings. If you have 70 cents to spend on each visitor for product B but your competition for a particular keyword is spending more like $1.50, how far down in the listings will your 70 cent bid place you?

Resist the temptation to artificially raise your bid to compete and, likewise, resist the temptation to bid 70 cents for a particular keyword or keyword phrase if it will only get you ranked 60th on the third page of search results. Find different keywords! It's the combination of the right bid and creative selection of keywords and phrases that yields success.


BID AVERAGING

You can also average your bids across keywords to come up to an average bid that equals your maximum bid price. Using our maximum bid of 70 cents for product B, an example of bid averaging would be bidding $1 on a highly competitive keyword that produces 1,000 hits per month and only 40 cents each on two keywords that each produce 500 hits per month. In a perfect world you would get 1,000 hits at $1, 1,000 hits at 40 cents, and your average bid would still be 70 cents.

Of course, it's not a perfect world. You're just as likely to get 1,000 hits at $1 and 100 hits at 40 cents which would give you an average bid of 95 cents. If you're going to attempt to use bid averaging, follow these guidelines:

1. Give yourself a cushion. Calculate your average bid up front to be less than your maximum. If you're working with a maximum bid of 70 cents, average it down to 50 cents, 60 cents max.

2. Make sure you average using similar keywords. Don't bid high on a really targeted keyword and low on keywords that are not likely to be nearly as targeted.

3. Always calculate your average bids based on a single product. Do not mix and match products that have different gross profit margins.

After you've gained some specific experience using bid averaging on a particular product, you can gradually work your average bid back up to your normal maximum.


WHY GO TO THIS TROUBLE?

It's all about opportunity. Pay-per-click advertising allows you to finitely target your sales message and attract visitors who are much more likely to buy. If you understand your products and what it takes to sell them, you will gain the maximum benefit from this type of advertising at the least cost. Anything less, and you are wasting money.

© Copyright 2003