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Pay per Click
Pay-per-Click is a way of advertising that took the internet world by storm some years ago and remains a key component of any marketing program. The lead supplier is Google through its AdWords system. The concept of pay-per-click (as exemplified by AdWords) is very powerful. This is briefly how it works:
After signing up, you create and place an ad
The ad is written around certain specified search terms
There is great competition for access to the search terms and who wins is determined by a bid process. People pay between 5cents and 50dollars to capture a term
Winning the auction is important as the winners end up at or close to the top of the page. In Google, this is the right upper side of every search page. It is a proven fact that the higher you are on the page the greater your chance of being noticed
So far no money has changed hands. This happens when someone clicks on the ad. The ad contains a link that takes the visitor to a web page the advertiser has specified
From the advertiser’s point of view, the system has some great advantages:
You only pay by results – the click-through
You know the visitor is ‘warm’ as they arrived at the ad in the process of a search using the specified search term
The advertiser can control how much they bid for a term
The advertiser can fix a budget, so there are strict limits on expenditure
The system lends itself to ‘test’ advertising, where you try out the ad first before committing to a campaign
The primary skills lie in writing the advertisement and keeping close track of the program
Google is the leading system largely because Google is the leading search engine with massively more visitors. It has also perfected its system for rapid set up and appearance of ads, for low cost of entry ($5 to open an account) and the very high quality of traffic Google brings.
The Economics of Pay-per-Click
Remember: the purpose is NOT to advertise, but the make a PROFIT. As with all advertising, you need to be deeply aware of the economics. However, pay-per-click is one of the only forms of advertising where tracing the initial link between spending and income is easy. With most forms of advertising, tracing this connection is usually a matter of faith.
Let’s take a simple concrete example: You are selling an affiliate product on which you earn a $30 commission net of all charges.
Your sales ratio is one sale per 15 clicks
With $30 profit, if you bid more than $2 per click you will lose money in the long haul.
Now something a little more complex: You sell the product, but you also expect to sell more stuff to the same customer.
This is how to calculate based on customer value. You expect to sell $100 to each customer over a series of sales. The probability of selling $100 is 50%. Your true expected income is therefore $100 times 50% or $50. If your sales (now customer acquisition) ratio is still 1:15 clicks you can spend $3.33 per click to get the customer – though this only leaves you at break-even!.
The further away you get from a simple direct sale and the more imponderables you have (e.g. the actual back-end sales and the probability of achieving them) the more difficult it becomes to decide how much to bid.
Finally, a word on ‘lifetime customer value’. Major corporations now look at the lifetime value of a customer relationship. This is similar to the customer acquisition cost problem above, but the timeframes are longer and the ramifications are greater (money potential, the lifetime word-of-mouth recommendations a satisfied customer can give etc.) It is easy to get lost in these kinds of analyses, but Membership sites in particular should look at member acquisition costs in the broadest context.93 -
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