The other day I was talking to one of my consulting clients on the phone about the return on investment from his Google Adwords campaign. And, he asked me a question that I get several times a week from clients and other online marketers.
His question was…
"Eric, how on earth can my competitors afford to bid over $4 per click for the number one position on the top keywords for my niche?! I can't make a profit on those keywords at just $2.00 per click!"
His concern is a common one among businesses that use pay-per-click advertising to generate traffic. It seems that the top positions in most competitive markets are reserved for businesses with more money than sense.
I explained to him that short term his best strategy is to just cast a broader net with his keywords by expanding his keyword list to include thousands of less competitive, yet still targeted phrases, by using tools like WordTracker or Ad Word Analyzer.
However, to remain competitive long term he needs to address the real reason that his competition can afford to bid $4 per click and still make a profit…
There are only 4 reasons that another business can bid higher than you on pay-per-click ads.
They have very deep pockets and very dumb marketing managers. You usually find this in businesses that are used to blowing their offline marketing budget on unaccountable "image advertising". While there are a few like this in every market, these are not the ones you need to be concerned with. The dangerous competitors are the next two…
They earn more profit from each sale than you. If you are making a $10 profit selling an ebook, yet your competition is earning a $100 profit selling a set of DVDs and a printed manual, then (all else being equal) your competition should be able to afford to bid 10 times what you can per click.
For example:
Site "A" is making a profit of $10 per sale and converts 1 out of every 100 visitors.
This site can afford to bid only $0.10 per click to just break even.
Site "B" is making a profit of $100 per sale. If they also convert 1 out of 100 visitors, then this site can afford to bid $1.00 per click to break even. (Better yet, they can bid $0.50 per click and earn a 100% return on investment!)
They are making their real money on the "back end". It is not uncommon for savvy marketers to sell a lower ticket item up front, and only break even or sometimes even take a loss, when they know that they can then upsell a good percentage of those customers on a higher ticket item later. Using pay-per-click advertising as a lead generation or list building method for future follow up is actually one of the most effective uses for this method of marketing.
They convert more of their traffic into buyers than you do. Even if you are both selling the exact same item at the exact same price, if your competition converts 5% of their traffic into sales and you only convert 1%… Well, it's no wonder that they can afford a $5 bid on "blue widget" when you are loosing money bidding $1.25.
You can get a pretty good idea who has the best converting website in any given market by watching the Google Adwords listings in that particular keyword niche for a few weeks. Unless they are one of those "more dollars than brains" marketers, the sites that constantly stay near the top long term are the ones that are generating the highest value per visitor.
The only way to compete long term on the super expensive keywords is to maintain a continuous focus on improving both conversion rates and average profit per sale.
Want to improve your conversion rates? Eric Graham is the CEO of several successful online companies. Internationally recognized as a top authority on eCommerce, Website Conversion & Internet Marketing, he's an in-demand speaker & consultant.
Get expert tips, advice, news and commentary on improving conversion rates, split testing, web usability, copywriting, internet marketing and more. Just visit Eric's popular Blog:
http://www.conversiondoctor.com/conversion-blog/
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