Overview

In today’s post, I will discuss profit maximization with Paid Search.  Fundamental to profit maximization is the trade-off between getting more clicks (visits to your website) in aggregate, and paying more per click.

So first, let’s discuss the dynamics of this critical trade–off.

Trade-off between Click Costs and Number of Clicks

Recall from my previous post that Quality Score and the Maximum CPC (Cost Per Click) together determine your ad position.   In other words, all other things being equal, the more you are willing to pay for every click or visitor, the higher up your ad will show.  The higher up your ad shows, the more clicks it will get.

So as you increase the Max CPC, your total costs increase for two reasons:

1)      You pay more per click or visitor

2)      You get more clicks compared to a lower ad position

This leads to a key question … how should you decide on the the right Max CPC for your business?

Value Per Click

For any kind of profit maximization, it is imperative that you measure value per click, i.e. value per visitor.  If you don’t know how much a visitor is worth, you are flying blind.  True, when you launch an advertising campaign, you may not know how much a visitor will be worth.  But you need to start collecting data that quickly gives you this information.

For instance, if you are using your website to generate leads, then the following data must be collected and analyzed.

1)      What percentage of visitors take a desired action? (e.g. fill out a contact form or call you)

2)      Of those who take the desired action, what percentage become clients?

3)      How much profits (excluding advertising costs) does the average client generate for you?

If you have the above three pieces of information, using algebra, you can work out the average value per click or value per visitor to your site.

Maximizing Your Profits

Now to be profitable, the amount you should be willing to pay per click (visitor) should clearly be less than the value per visitor as measured above.  The question then is:  how much less?

The above question can only be answered after significant data has been collected and analyzed.  You can then determine the sweet spot of profit maximization which is the Max CPC that maximizes your profit, all other things being equal.  Even once you reach this “sweet spot”, note that changes in the environment will cause the sweet spot itself to vary with time.  So you have to continuously be measuring and adjusting your Max CPCs.  Your work is never quite done.

In my next post, I’ll discuss the simplest form of Analytics that you can use and that is Conversion Tracking in an Ad Platform you use, e.g. Google AdWords.

Written by Nadir Hussain
COO, Media Flint, Inc.

Nadir Hussain is an Internet Advertisement and Search Engine Marketing expert. He is both Google and Yahoo certified for their Internet Advertisement programs.  He teaches an Internet based Advertising class both at UC/Berkeley Extension and the Continuing Studies Program at Stanford University.  His education comprises of a Bachelor’s degree in Computer Science & Mathematics from UC/Santa Cruz, a MSEE from Stanford University and an MBA from UC/Berkeley.