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The Cost of Keywords on Google Adwords and Overture, What's a Keyword Worth?

The million dollar question when using pay per click search engine advertising is what is a keyword worth, how much should you pay for a click?

The answer is, of course, it depends. If you are a small business on a limited budget, the cost of the keywords you buy should be less than your profit margin on the products or services you are selling. When possible, you should track visitor behavior and sales associated with each individual keyword. Using most tracking tools, you will be able to see the direct response from your keyword buys.

Not all sales occur on the initial referral from a keyword listing

Typically, about 50% of sales associated with search engine referrals or paid keyword placements will occur on that first visit when the customer clicks through to your site. The other 50% of purchases will occur on subsequent visits. Unless you use a high end tracking system you won't be able to trace all your sales back the individual referral source.

Lets say you have an item that retails for $100.00. The item costs you $50.00 wholesale and when you allocate administrative, packing, and shipping costs that tacks on another $10.00. Every time you sell one of those items your out of pocket cost is about $60.00, which leaves you a 40% margin or a profit of $40.00 on each sale. That leaves $40.00 per item you can spend on marketing costs and still break even.

Track your conversion rates

Lets say your conversion rate (visitors/sales) is 2%, typical of many ecommerce sites. That means 1 in 50 visitors purchases the item. If all 50 of those visitors come from keyword buys you can spend ($40/$50) $0.80 per click and still break even.

You can't directly measure the full value of a keyword referral

There is an intrinsic value associated with a potential consumer simply visiting your site. Large companies often call this branding. It is simply building awareness of your site. In addition this branding value, anywhere up to 50% of the sales you will make from a pay per click campaign will come from subsequent visits to your site. If your analysis software is based on log files it almost certainly won't capture sales from repeat visits and associate them with the initial referral source.

Calculate how much a keyword is worth to you

So what's a reasonable cost to pay for a keyword? Whatever you can afford, at least at first. Run tests for some keywords and track the results. Identify what a sale is worth (sales price - (cost of good sold + overhead)) and keep your marketing expenses below that. If your primary goal is to generate leads, determine you conversion rate on the site (visitors/leads = website conversion rate) and what is a lead worth (profit on a sale*(sales/leads) = value of a lead) and keep your marketing expenses per led below the value of a lead.

A real world example

If you were selling new homes at $500,000 a piece the calculation would be the following:

Costs and conversion rates:

  • Sales price - $500,000
  • Cost to build the house - $200,000
  • Administrative expense - $50,000
  • 3 out of every 100 leads results in a sale (3% conversion rate)
  • 2 out of every 100 site visitors requests more information and becomes a lead (2% conversion rate)

Maximum cost per click calculation:

Margin on a house = ($500,000 - ($200,000 + $50,000) = $250,000
Value of a lead = $250,000*(3/100) = $7500
Maximum cost per click = $7500 (2/1000) = $150.00

How much can you spend?

Assuming all costs are included in this calculation, the company selling new homes for $500,000 could afford to spend $150.00 per click or $7500.00 per lead and break even. Naturally they'd want to make money so they'd want to spend significantly less than that.

Run a similar calculation with financials from your company and you'll get a rough idea of what you can afford to spend per click.

Ready to learn about specific pay per click programs?

Once you make the calculations, hop on over the articles on Google AdWords, pay per click advertising on Overture, FindWhat, LookSmart and Trusted Feed Programs.

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