eg. Facebook or Google Analytics

Paul Thornton - Tuesday 22nd November 2011


Adwords: it’s not marketing spend, it’s a cost of sale.

That’s right – stop thinking of Adwords as part of your marketing spend! Would you stop paying one of your sales team from selling more just so you didn’t pay them more bonus in a given month? Or stop your reseller selling products? Of course you wouldn’t, you’d make sure they just kept generating as much business as they could because you know you’re making money on it.

Image of the Google logo with a dollar sign behind representing the value of Google Adwords

That’s the key to it of course, knowing if you’re making money or not. So let’s first make sure we know if we’re making money or not online (see last week’s post for some more detail on this).

So now we should be able to tell exactly how many sales, enquiries, downloads etc we’re getting for every single dollar we spend, for every ad you run and for every single keyword you’re using. (NB. If you, or whoever runs your Adwords can’t tell you this information then you need to get in touch with us ASAP. It’s impossible to run Adwords effectively without it). And whoever is doing it for you really should be able to provide it to you – after all, it’s your dollars that are creating the impressions and visits, so how can you assess how they are doing if they won’t tell you?

Anyway, what’s this all got to do with Adwords not being part of marketing? It’s simple really. Once you know how much each sale, appointment, enquiry, download, application or enquiry is costing you, you should just go out and get as many as you can as long as it stays under whatever your effective cost per sale/appointment/etc is.

If you have a monthly budget for Adwords and if that is spent in 2 weeks, but it has been more than profitable – why would you pause the campaign if it’s gone over your budget? If your Cost per Acquisition (CPA or Cost of Sale) is, say, $20 and your average order value is $200 – that’s a 10% Cost of Sale. However if your product cost is 40%, then that’s a Gross Profit of 50%. If that’s sustainable for your business, why stop once you have run out of budget? After all, if you can find another $20 then you get another $200 back – why not put as much capital you have in order to generate as much revenue back?

We have a big client for whom online bookings is a crucial part of their business. So we set, as a percentage, a cost of sale which is profitable for them, and each month we “buy” as many sales as we possibly can below this threshold, using Google Adwords. Now that is done, Google Adwords isn’t included in Marketing budgets in any way at all, it lives in a totally different place in the balance sheet, it sits as a direct cost (under Cost of Goods Sold, or C.O.G.S.) and the client is making more money.

On the other side of the coin, imagine the Adwords advertiser who turns their Adwords off in a particular month so that they can “save money”. If they don’t know how much they make for every dollar spent on Adwords, this might seem sensible. But not when you’re making a profit on every dollar spent…it’s actually more expensive to turn Adwords off than to leave it on!

And that’s exactly why you need to stop looking at Adwords as a marketing expense. Once you know how much each dollar spent returns for you, and you have someone smart like us making sure that’s good and profitable, the last thing you’d do is limit this expenditure. Buy as much profitable business as you can handle and enjoy watching your revenues increase.

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