Marketing on Internet Road 

Google AdWords is a great lead generation strategy and an amazing tool for generating immediate traffic to your website. It is a very intuitive system, quick to set up and easy to track on results.

And here comes the “but”: just like any other marketing initiative, we need to take a look at the big picture. Since we are mostly interested in Return on Investment, using Google AdWords needs to make business sense.

Here is an example:

Assumption one: Imagine a competitive market where the average Cost per Click (CPC) for the keywords we wish to bid for is €7.5 (or Dollar, or any other currency as it does not matter for the exercise).

Assumption two: we use the global benchmark for Click through Rate (CTR) on Google AdWords, and that is 2% (you should always opt for a higher ratio, but for this exercise it will actually make things worse as you will see later on).

Assumption three: we use the global benchmark for Conversion Rate, and that is 2% as well. Now, this is a ratio that you really wish to improve since the results will be much better and since plainly put – it is your revenue.

Assumption four: are Lifetime Customer Worth is €225. This includes the initial sale as well as repeating sales later on and so forth.

Now, for the calculation:

In order to have one customer we need to drive 50 visitors (1 divided by 2% conversion rate).
50 visitors from AdWords will cost us €375 (50 times €7.5 CPC).
Our profit (sorry, loss) per customer is €150 (€225 minus €375). Oops!

So, what went wrong?

Nothing really. This is a classic case where the Acquisition Cost is higher than the Revenue per Customer which actually mean that you should either make your goods more expensive, or increase the Customer Lifetime Worth (by creating more up sells opportunities or recurring sales), or find an alternative acquisition channel that will make business sense.

As for the CTR comment that appeared before: actually, CTR is not really a factor here since we measure things by a single acquisition. But (and it’s a big but), if your acquisition costs are higher than your revenue per customer, higher CTR means you are spending more money on Google AdWords. You will get more customers of course (do the math: conversion rate stays the same but you get more traffic), but eventually you will have X amount of customers with a loss per customer of €150, so more customers – bigger loss. You should have a really good reason to want to be in this situation.

No matter what is your lead generation strategy, always check the acquisition cost compared to your revenue per customer. We used Google AdWords in this example since a many are rushing to this generally very good Search Engine Marketing strategy without doing the proper calculations first.