Are You Gambling All Your Money Away?

I recently recommended a friend to affiliate marketing with Google AdWords and he told me he made over 5 sales on 1 product. I was very happy for him but I also asked him how much did he spend for his advertising and what’s his profit. He couldn’t really give me a concrete answer but he did say it was merely breaking even. The next time I asked him, he told me he was losing money on that product with a maximum CPC of over $0.30.

This is great lesson for everyone who bids without calculating your profitable range of CPCs!

Last December, I posted about my dog campaign. If you skip this step on calculating how much money you are going to spend, you’re going to enter your CPC bid price like a gambler who puts money into a slot machine and hopes to hit the jackpot and have a lot of money to fall out. Coincidentally, my friend has a gambling habit of betting on football matches so its a hard habit to kick!

How Much Money I Am Going To Spend?

Let’s say I have Product A, which has a commission of $23.50, a conversion rate of 2% and a number 1 position at the PPC search engine at $1.00 per click.

Gambler Goes Like This….

He doesn’t know how well the product will convert. But he does know if he bids $1.00 per click, his ad will be displayed prominently at the top of all the other PPC ads! So what does he do? He bids $1.00 per click for the number 1 spot and hopes it will be profitable. 100 clicks later… this is what happens:

No. of clicks = 100
Converstion Rate = 2%
No. of Sales = 2
Commission per sale = $23.50
Gross Profit = $47.00
Gross Proft per visitor = $0.47

Expenses = $100.00
Net Profit = -$53.00
Net Profit per visitor = -$0.53

So gambler loses $53.00 on 2 sales. He goes around telling people this PPC thing is a scam! It doesn’t work anymore like what the books say.

Smart PPC Marketer Goes Like This….

No. of clicks = 100
Converstion Rate = 1%
No. of Sales = 1
Commission per sale = $23.50
Gross Profit = $23.50
Gross Proft per visitor = $0.24

Smart guy assumes that the conversion rate is 1% so he expects to make 1 sale in 100 clicks and if it doesn’t work out, he drops the campaign and looks for another product to promote.

While everyone else is bidding on very targeted and expensive keywords, smart guy does his homework and finds out what his target consumers will search on at the search engines. Smart guy decides that he wants to make a 50% – 60% return on his investment.

ROI = 50%
Max. CPC = 50% x $0.24 = $0.12
Expenses = $0.12 x 100 = $12
Net Profit = $23.50 – $12 = $11.50
Net Profit per Visitor = $0.12

ROI = 60%
Max CPC = (100% – 60%) x $0.24 = 40% x $0.24 = $0.10
Expenses = $0.10 x 100 = $10
Net Profit = $23.50 – $10 = $13.50
Net Profit per Visitor = $0.14

Smart guy calculates how much he should bid on before he creates the campaign. So he now knoes if he bids a maximum of $0.12 per click and it sells for $23.50 per sale with 1% conversion rate, he will get a net profit of $11.50 after $12.00 expenses. The most the can lose after 100 clicks is $12.00. He is prepared to lose $12.00 and move on if it doesn’t work out. 100 clicks later… this is what happens:

No. of clicks = 100
Converstion Rate = 2%
No. of Sales = 2
Commission per sale = $23.50
Gross Profit = $47.00
Gross Proft per visitor = $0.47

Max. CPC = $0.12
Expenses = $12.00
Net Profit = $35.00
Net Profit per visitor = $0.35

Smart guy discovers that Product A has a converstion rate of 2%, 1% more than the he expected. Therefore he received 2 sales. He spent $12.00 to make $35.00 in profit. He is happy and now he can expand this campaign with more keywords to see if he can squeeze more money out of it.

The Moral Of The Story Is….

1. You have to do your numbers before you enter the game
2. You have to track your sales and expenses during the game
3. You mustn’t treat this PPC game like a gambling game!

Here’s my Google AdWords Excel Profit/Loss Spreadsheet. The last time I posted a link to this spreasheet only 5 people downloaded! Please get it and get your campaigns tracked to know exactly how much you are making with your campaigns, which campaigns you should drop and stop being a gambler. And if you’re interested in learning how to bid on cheap keywords and avoid the competition, please get yourself a copy of Google AdWords 123.

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2 Comments On “Are You Gambling All Your Money Away?”

On 7th March 2005 9:28 PM, Extraword said:

Interesting and factual analysis. I do my adwords campaign part time and follow the 50% ROI rule when testing a campaign. I am no where near your current number of campaigns per month and I admire your new target considering that I am on my 12th campaign and yet to make a single sale.

One of the diffculties I have identified with my campaigns using your analysis is researching keywords that will get my ads at least on the first page using a Max. cost per click as set out in the analysis. I use Keyword Equaliser for my keywords research but can’t say this has help me much in generating that hidden keyword that will give me the edge. I also apply the principle in Google-Adwords123

Two questions:

In a new campaign, do you raise your initial cost per click above your limit in order to improve your ad position CTR as some affiliates suggest?

Have you found a more affective way to researh relevant keywords with CPC at least below your calculated max. cost per click?

On 7th March 2005 10:56 PM, Vincent said:

Hi,

Answers:

1. I would increase my CPC only if it helps me convert well enough. I track my results and if increasing my CPC doesn’t help me get more sales, I lower it back down.

You could test bidding on popular keywords and bid high if you have the money but always track your results to see if you are making a profit.

2. I am able to find cheap keywords by searching for the top brand names of my chosen product. For example I would bid on a very popular dog web site’s name and URL.

Go to Google.com and search for “dog” and see what web sites come up in the listings. Copy and paste the URL name into a keyword software and see how many searches came up per month. I use the URLs with over 1000 searches per month. Sometimes I get very lucky with some keywords with over 10000 searches per month with almost no one bidding on it.

Cheers,

Vincent

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