Over the course of 10 years managing Google AdWords campaigns, budgeting for paid search has always been the biggest debate within companies.
Some marketers will want to spend as much money as possible to gain market share. Conservative members of the business will want to focus on profitability of campaigns and minimize risk of wasted spend.
And yet others in the organization will simply just say “no” to everything that they see. If it wasn’t their idea, then it’s not worth pursuing, right?
Everyone has an opinion on how money should be spent with AdWords, and therefore everyone wants to be heard.
But too many opinions gets in the way of progress and can stop an advertising program dead in its tracks.
Providing the right data will mute opinions and get people on the same page
Data driven is the mantra of the digital marketing age. Google AdWords is the ultimate data-driven platform for marketing.
You may have heard people say “Listen to the data and let it form your opinions” or “Stop relying on your gut instincts and trust the numbers” and thought that this made a lot of sense. But you may have also found it impractical in the real world.
This lesson is all about providing you with a data driven framework for making your case.
With the right numbers behind your argument, opinions become irrelevant.
What is the right data?
The components needed for accepting data driven advertising
Let’s focus on the inputs we need to understand so that we can predict the outcomes from advertising with AdWords.
We first need to have an approximate budget for what we will spend. This number is just a baseline, and can change as you play with the numbers.
Next, we need to know what we will be paying per click. At first, the best tool we have to determine this number is through the Google Keyword tool. It will provide us with an approximate cost per click that we can use as a placeholder. Notice that the number will often be much higher or much lower than your actual results.
After that, we need to understand how many people will convert on our website into customers. This is the percentage of people who will convert. Use 2% to start if you do not know your conversion rate. That is the “average” for the web, although most websites are much higher or much lower.
We input these values in our spreadsheet (which you can download in our bonus materials section) and we get several new metrics to play with as well. Note in the screen shot below that all blue cells are variables that we can change early and often in this process.
With these three inputs we can infer all kinds of metrics about our business. We can see how many website visitors and leads we will get, and how much we will pay per lead.
Each of these metrics are important for understanding the impact for our business. But we need more to complete our data driven argument.
Tying our Google AdWords marketing activity to the rest of our business
Showing the above numbers to others in your business will likely not be enough to win a data driven argument. This is because we are missing a big piece of the business picture and leaving room for opinions.
What are we missing? An estimate on how this advertising will affect the bottom line of the business – how will the company profit from AdWords?
You may think that this is above your pay-grade, and it probably is! But this is a key component to getting adoption.
Here is how we figure that part out.
First, we need to understand our sales numbers. What percentage of the inquiries that we generate become legitimate business leads?
What percentage of those leads become legitimate business prospects?
Then, what percentage of those prospects purchase from our business?
How much money do we make from each deal we generate?
What is our margin on that sale?
How much net revenue do we make off each lead you generate?
How much did it cost?
What is our return on investment?
These are some heavy questions! You may have never heard these terms, and you probably won’t know all of the answers. That is OK. We have a spreadsheet that allows us to play with the numbers.
With many variables in place, we can start to see what it will take to make Google AdWords profitable.
Getting others to participate in this process
Understanding each of these variables is difficult, because it usually involves different people in your organization to give you each number.
A salesperson may be required to help with the sales numbers. Invite them to the table!
Your CFO may be needed to give you product margins. Invite them to the table!
If you create this spreadsheet on your own, you will find that you make some false assumptions. That is why it is best to fill out this spreadsheet with others in your organization.
People will try to poke holes in the numbers you see. This is where variables come to the rescue! Someone pokes a hole, you simply modify the number based on their feedback. Right there in real time.
Use this spreadsheet to make real time adjustments. To get buy-in within your organization and come up with a plan of action.
This model is your data driven argument
Using this model to map out your path to profitability with AdWords is taking a data driven approach to advertising. This is how you establish your objectives for online advertising.
By filling out this model, you can answer questions like:
- What CPC do I need to target in order to make AdWords work?
- Will we be able to be profitable if we don’t fix our landing page conversion problem?
- How much should I spend with Google AdWords?
That last question is often the most important for a business. Understanding how much to spend is something that needs to be developed from the ground up.
How much should I spend with Google AdWords?
Notice how the first column of our spreadsheet was how much we spend with AdWords, yet it is the last question that we answer in this process? That is by design.
You really won’t have any idea how much to spend with AdWords until you can determine your profit points. You can’t determine profit without really understanding your business.
But then once you understand your business, you can start to answer some basic questions.
So how much should you spend with AdWords?
On the second tab of the spreadsheet, we have an area where we can project different scenarios to see how they affect performance. There are certain variables that are likely to change as we spend more or less with AdWords.
We might find that our cost per click goes up as we spend more. Or we may find our sales success rate goes up with more leads coming in.
This scenario projection allows us to estimate what will happen at various AdWords spend levels. We can tweak the numbers to establish an equilibrium of profitability.
The answer is that you should spend as much with AdWords as you can to generate profitable sales for your business. You will find that your profitability scales fairly well with AdWords. As you spend more, you can generate more business.
Eventually that profitability will start to decline. That is when you know how much you should spend with AdWords.
Spend as much as you can to profit. But before you get there, you need to understand a lot about your business.
Our budgets may be the first thing we think about when it comes to advertising, but it is something we should establish last.
If you are confused about this lesson, let me know in the forums. This is an advanced topic that I learned over the course of several years, and that is why it is a bonus lesson.