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July 11, 2011

When Paid Search May Be Losing You Money and You Don’t Know It

Using a PPC strategy was a good idea. From your perspective, it’s worked and it’s making you money. The figures tell the story. The click through rate is above average. The keywords and ads are working well. And you’re getting a satisfactory conversion rate and ROI.

But simply taking your results at face value can give you a false picture. Because you can be making a big mistake when looking at these.

The criterion of success for PPC search is whether it can meet your goals profitably through conversions. For instance, you could be trying to get subscribers for your newsletter. Or trying to generate leads. Or online selling (e-commerce). No matter. In all cases, these goals are about converting visitors into prospects or customers.

So, the decision to use a PPC strategy is about the value of each conversion to you. And the amount you have to spend in advertising to get it.


Although Google does this for you, here is how to work out the average cost per conversion. Divide your total costs per click (CPC) by the number of conversions. Let’s say you spend $1200 on paid search clicks and you get 20 conversions.

That makes your average conversion cost $60. To put it in practical terms, $60 has been the cost of every sign-up, lead or online sale.

Of course, it depends on the conversion rates can you expect from your keywords and ads. Unfortunately, there is no precise formula. And rates vary across industries. It also depends on the quality and nature of the offer you’re making. But here are some general guidelines. Especially if you are giving something away, sign-up conversions can be very good. I’ve hit rates of 30% and more, but up to 10% is more realistic. Lead generation is lower, 2-4%. E-commerce can be as little as 1-2%.

Imagine you are in e-commerce. Each click is costing you $1 and your conversion rate is 2%. The outcome is that the cost of each sale is $50. Assuming your average basket or sales value is $50 or more, you would appear at minimum to be breaking even.


But the assumption you’ve just made may not be accurate. Many PPC advertisers misjudge the situation by failing to look beyond the sales value. They forget that this is not their profit. Imagine that the total value of the products in the basket is $50. But let’s assume that your profit is only $20.

So, for every $100 it costs you in clicks, you get back only $40. Your PPC campaign has made a loss of $30 per transaction. If you count just the profit, as you should, then at $1 CPC to breakeven you would need a basket value of $125.

Of course, these figures are generalizations, but they should prompt you to look again at your results. If the bad news is that you PPC is not profitable, don’t just abandon it.


It’s likely that you could perform a lot better. To some extent because you thought your results were fine you unconsciously became complacent and did not do as much work on your campaigns as you should have.

So, re-examine your whole approach to paid search. If appropriate, look again at your PPC strategy. If you’ve been using a management company consider firing them. Because a good professional would have brought this matter to your attention from the outset.

With good PPC management, ongoing optimization and improving the quality score on your keywords and ads, you could cut your CPC and improve conversion rates. And perhaps then transform your PPC marketing into a profitable strategy.

Tom Wilson is an expert in Internet marketing and an award-winning marketer. He specializes in internet marketing and has been providing marketing services and consultancy for almost 10 years. He is a Chartered Marketer, and a Google AdWords qualified professional. His website offers SEO services and a range of PPC services. These include PPC management, campaign setup, mentoring, and AdWords training courses.