Marketing in the recession – can we afford to advertise?
Can you afford not to is more the question!
In any downturn, most people’s thoughts quite rightly turn firstly to cutting costs as a means of ensuring the security of their business. However, there is probably a limit to how far you can go with this unless you were previously wasting heaps of money on unnecessary expenditure. One of the first areas to come under scrutiny for cuts is marketing and particularly advertising. Should you continue to advertise in the current recession?
Somebody wise (I forget who) once said “Half the money I spend on advertising is wasted, the trouble is I don’t know which half”. This uncertainty about the effectiveness of some advertising makes it a worthy candidate for consideration at least, when it comes to getting the red pen out. If it isn’t making you money then you should cut it. The trouble is how can you tell if it will make you money or just cost you money until you’ve done it? And then it’s too late…
Limit your exposure
Not necessarily. Sure if you blow several thousand pounds on a print advert and it doesn’t work, that money is down the drain for good and there’s no way of testing it first. However with AdWords you can test it. You can run your advert for just one day, a week, or just a few hours – however long (or short) a time you need to find out whether it works or not. You’re already halfway home and dry because you only pay when somebody clicks on your advert so it’s pretty much payment by results anyway.
The only issue with AdWords is whether the amount you have to pay per click, multiplied by your conversion ratio is sufficiently low for it to be profitable. This is something you can only establish by trying it but the good news is because AdWords is so controllable (i.e. you can turn it on or off at a moment’s notice and you can set a limit on your spend) you can test your advert for very little money. The chances are that it will be profitable because the amount you pay for each click is determined by the market (other people advertising on the same keywords) and the market, like all markets finds it’s own level.
Lets work through a simple example of how to establish the profitability of an AdWords campaign:
Worked example
We’ll take a hypothetical product that you buy for £65 and sell for £100, giving you a gross profit per unit of £35. You setup a simple AdWords campaign and choose some likely looking keywords to trigger your advert – maybe just half a dozen or so to begin with. You set your initial maximum bid at say 30p and you set a daily budget of £100 and you figure you’ll run it for 3 or 4 days to give it a fair trial. If you pay the maximum per click and if you reach your daily budget each day, this gives you a maximum exposure of £300-£400. Hardly likely to break the bank, even in the current climate! if you spend the whole £300, at 30p per click this would generate 1,000 visitors to your site. To break even, you would have to sell 9 units (£300 divided by £35) which would be a conversion ratio of just under 1% which seems feasible so you decide to proceed.
After 3 days you find that you only spent £200 as your campaign didn’t reach your daily budget, but you also find that your average cost per click was actually only 20p – less than the 30p maximum that you set. Happily, you also find that as a result of the advert you have sold 10 units. Not only have you made a profit of £150 (10 x £35 = £350 minus AdWords costs of £200) which is a 75% return on your investment, but you have also established the metrics for the profitability of your AdWords campaign:
Total number of clicks: 1,000
Total number of orders: 10
Your conversion ratio is therefore 1% – you get on average one order every 100 clicks
If your profit per order is £35 and your conversion ratio is 1% then your profit per click is 35p. As long as your cost per click remains under this figure (and the conversion ratio remains the same) you will always make money – no matter how much you spend.
Armed with this knowledge, your goal now becomes to generate as many clicks as possible under this limit whilst maintaining or hopefully even improving your conversion rate. You will now experiment with different keywords and different ad copy and landing pages to try to generate more business, always keeping track of the results to see what works and what doesn’t.
That’s a very simple example but it’s also a very typical one. You’re unlikely to strike it rich overnight and make an instant fortune with AdWords but you are likely to be able to generate more business profitably and gain a better understanding of what your customers are looking for on the web. And that’s the name of the game, not just in a recession but at any time.
Tags: advertising, adwords, profitability, recession
This entry was posted on Monday, January 5th, 2009 at 3:32 pm. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
