Google Search Ads: Its costs and measuring ROI

In the previous post, we talked about search ads and their value to your business. And I’m sure that by now we’re all familiar with the reasons why you need to have a good SEM campaign for your brand.

If any of these sound like gibberish to you, head over to the part one of this post.

Now that you understand the value behind this marketing channel, the next logical question is “How much would it cost me?”. I like to think of that question in a different way.

The general best practice of any marketing campaign is to spend more as long as Return On Investment (ROI) remains positive. And that is precisely how you think about online marketing. If you spend ₦50,000 on marketing and you get ₦100,000 in profit, not revenue, I’d say throw the ₦100k back in. But lets not get ahead of ourselves, lets start with the basics.

How you are charged for search ads

Before moving ahead, keep one thing in mind, Google is the king of search. Which means, whatever Google does, everyone else (Bing, Yahoo and anyone else out there) follows. So when we refer to Google while talking about search ads, we kind of mean everyone.

Google search ads are charged on a simple cost-per-click (CPC) model. Which means that you as an advertiser only gets to pay when a user clicks on your advert. This means that if you run a search ad and it shows up 1,000 times, but only gets clicked on once, you only pay for that one click. This provides a lot of transparency for search advertising, and is one of the reasons for its success.

But how much do you pay for each click? That’s where things get interesting. First lets define a few terms

  1. Cost per click (CPC) is the amount you pay as an advertiser for every click
  2. Maximum cost per click (Max CPC) is the most you’re willing to pay for a click
  3. Ad rank is the position of your search ad on the Search Engine Results Page (SERP)
  4. An impression is your search ad shown to a user once

 

 The Ad Auction

To determine your cost per click, Google carries out an auction. This auction is bid on by you as an advertiser, and your competition. Lets take a simple case study.

You, Advertiser A, sell red shoes (the expensive ones 🙂 ), and you setup an ad for the keyword “red shoes”. Which means that every time someone searches for something related to “red shoes”, you want your ad to be shown. Advertiser B also sells red shoes and has a search ad setup for the same keyword.

A Google search user, John, decides he’d like to get red shoes for his girlfriend’s birthday. So naturally, he goes to Google to look for “where to buy red shoes online”. Immediately John hits enter, an ad auction takes place. All advertisers (you, advertiser A, and advertiser B) bidding on this keyword are included in this auction. Assuming that while setting up your campaign, you set your Max CPC as $1, which means you’re not willing to pay more than $1 per click, and advertiser B says they’re only willing to pay $0.5 as a maximum CPC, Google charges you just enough to beat advertiser B. In this case, you might get charged $0.51, even though your maximum CPC is actually $1.

Other factors that affect your CPC

Your maximum CPC isn’t the only thing that impacts your actual cost per click. Other factors like your ads quality score come into play, although we will not be going into that today. A few factors that can affect your ads quality score are

  1. The quality of the page you send users to after clicking on your ad (landing page)
  2. The speed at which your website or landing page loads
  3. The rate at which people click on your adverts (Click through rate or CTR)
  4. How relevant the keyword is to your search ad and landing page

We’d elaborate on those in other posts, be sure to be on the lookout for them.

Calculating ROI on your search ads

When do you know if running search ads make sense for your business? How do you make a business decision to continue running it for longer periods when you start out? Simply by calculating its Return On Investment, popularly called ROI.

To get the ROI on your search advertising, you’d need to calculate the cost for running your ads and how much revenue they bring back for your business. If the revenue is greater than your ad spend, that’s a good first step.

Next you need to calculate the profit on each purchase from your search ads. If you run at a profit and not a loss, then you’re on the right path. If on the flip side you don’t make any profit after spending $500 on search ads for example, you’d like to rethink your approach to your search ads.

Like we mentioned in the first post, search advertising is about reaching people actively looking for your product. Hence you ideally should get quality users who are in the best stages of the purchasing cycle. Search ads are not an awareness medium, you don’t announce your products with search advertising, you get people who are already reaching for their wallets (metaphorically speaking), so treat it that way.

Do you already use search ads for your business? Share your findings and thoughts with us in the comments box below.