A formula to determine if Google AdWords will help your small business.

By Jennifer Chan

Also read:
Google AdWords for SMBs
How Much Does it Cost to Advertise on Google?

Business Owner: Will Google AdWords work for my business?

Seedy Marketing Exec: Definitely! You’ll get seen when someone searches for the services you offer and only pay when they actually click to your website. It’s a sure thing.

Unfortunately, just as the best meteorologist can’t promise it’s not going to rain tomorrow, the most experienced AdWords Campaign Manager can’t promise Google AdWords will work for your business (and if they do make that promise, don’t trust them!).

What we can do is help you with the metrics. To this end, we’ve created a formula to help you determine whether spending some money on Google advertising might be a worthwhile investment. While this formula is no guarantee of profitability, it will hopefully give you enough data to decide if Google Adwords is worth it for your small business. 

What is Google AdWords? Click here for an introduction.

To start, for the sake of this exercise, assume that Google AdWords will produce 10 qualified leads in a month for your company. A qualified lead is someone who calls, emails or fills out a form on your website. (In reality, for the most part, the number of leads you get will depend upon the amount of money you choose to spend.)

Now answer the questions below:

1. What service or product do you want to sell more of?

Example: Darlene, owner of Delicious Dahlia’s, a hypothetical Sonoma landscaping company, wants to sell more backyard installations.

Note: Often, businesses have particular services that they'd like to promote. Maybe you've got a new service; maybe you've determined that one particular product is more profitable then others. Whatever it is, for the purposes of this exercize, choose one product or service to focus on. 

2. If you receive 10 new, qualified leads for this service in one month, how many can you close?

Example: Darlene says she can close 50 percent of qualified leads.  Number of sales = 5

Note: A well-run Google AdWords campaign produces highly qualified leads—consumers who are interested in the services you offer and are in the right geo-location. Realistically, out of 10 qualified prospects, how many convert to customers?

3. What is your gross profit-per-sale?

Example: Darlene makes a $2,000 profit on an average backyard installation.  Profit-per-sale: $2,000

4. What is your cost-per-lead?

Example: Darlene’s estimated cost-per-lead is $50.

Note: The cost-per-lead is the trickiest number to identify. There are many online tools that will estimate how many clicks your ads will get (including Google), but predicting how many of these clicks will become leads is much trickier. (For help, check out How Much Does it Cost to Advertise on Google). The click-to-lead ratio will vary greatly based on factors both within and beyond your control, such as:

  • The ads themselves
  • How your ad campaign is built
  • Keywords
  • Local competition for those keywords
  • Your industry
  • Your landing page
  • The Google bots’ “opinion” of your campaign and landing page
  • Factors Google intentionally obscures

The best way to get a reliable cost-per-lead is to run AdWords and follow the metrics. For the past four years, Nu-Designs Digital has been running around 200 AdWords campaigns per month for our parent company, American Ratings Corporation (ARC). We’ve seen that we can get qualified leads for about $50 per lead for ARC clients. These are emails or phone calls to Bay Area-based small- and medium-sized service industry businesses (landscapers, general contractors, auto repair, etc.). Of course, it varies by company, and more importantly, by industry. Roofing leads, for example, seem to come in at about $35 per lead, while other industries are higher. Still, given our experience, we feel confident using a $50 cost-per-lead as a default for service-based companies.

But what if your company doesn’t fit into this particular industry niche?

I feel less confident about a number WordStream recently produced, but it’s useful as a baseline. WordStream research suggested a click-to-action rate of 2.7 percent as an average across all industries. With this figure, 100 clicks in a month at $5 per click would result in approximately $20 per action. In this case, an “action” could be a completed form or a phone call, but it could also be a sign-up for an email list or a blog subscription. For our purposes, let’s say 50 percent of actions became qualified leads. That takes us back up to between $40 and $50 per qualified lead.

For the purposes of this exercise, use a $50 cost-per-lead to work the formula below. Be sure to work it again with different variables to get a more realistic sense of what would and wouldn’t work for you.

Now that you have numbers, plug them into this formula:

(Number of Sales x Profit-Per-Sale) - (Cost Per Lead x 10 leads) = Total New Revenue Per Month

Example: For Darlene at Delicious Dahlia’s:

Number of Sales: 5
Profit-Per-Sale: $2,000
Cost-Per-Lead: $50
Leads: 10
($2,000 x 5) - ($50 x 10) = $9,500 total new revenue from Google AdWords

As you can see, for Darlene, AdWords might be a very good investment. (The $50-per-lead estimated by Nu-Designs Digital includes NDD’s monthly management of the account, so once the campaign is set up, $500 is her total monthly spend.)

5. Are you ready to test different variables?

Example: Change Darlene’s Cost-Per-Lead to $100

($2,000 x 5) - ($100 x 10) = $9,000 total new revenue from Google AdWords. Still looking pretty good.

Change her number of sales to 2:

($2,000 x 2) - ($50 x 10) = $3,500. Not as fantastic, but still a tidy sum.

Change her profit-per-sale and her number of sales:

($500 x 1) - ($50 x 10) = $0. AdWords suddenly doesn’t look so great.

Maybe Darlene doesn’t have a high profit-per-sale, but she has a great close rate:

($200 x 9) - ($50 x 10) = $1,300. AdWords might make sense for her after all.

And that’s it! You know your business better than anyone, and hopefully this formula gives you enough new information to make a good decision about whether Google AdWords will help grow your business.

If you’re interested in running AdWords for your business but don’t have the know-how or time, we’d love to do it for you. Email us or call Nancy at (707) 575-5373.
 
To read more of Jennifer Chan's work, check out her writing for the Diamond Certified Blog.