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What’s the Deal, is Everyone in the PPC Market Lying and Cheating? Well Not Really, Unless You Consider Lying by Omission Cheating, or Maybe They Themselves Simply Don’t Know Enough. Which is Scarier?
The most likely answer to this question is that it might be working just fine, you might just be handicapped by probability and odds.
Some of the most common questions we get here at Danconia and The Contractors Coalition surround Google AdWords and underperforming, or most often the case, nonperforming AdWords campaigns that have plagued them for years. No matter the business you are in, HVAC, water damage restoration, roofing, remodeling, property management, warehouse racking, or any business for that matter, you are most likely experiencing a negative impact on your PPC campaign due to mathematics. Most customers in fact also have to deal with improperly run campaigns by non-professional AdWords companies, but everyone suffers from the same game of chance, and a non-favorable probability curve. This is the dirty little secret of digital marketing that nobody wants to talk about.
In full disclosure we prefer to place customers in strategic organic SEO campaigns (more on that in a later post) as opposed to Google AdWords. With that said, we love Google AdWords! So why do we recommend against it in most cases? Math. Probability. You know the stuff we are taught in high school or college that our teachers and parents said one day we would have a use for, that stuff. And boy do we. Most people will read this article and afterwards realize they could have saved a ton of money they wasted running AdWords campaigns that produced nothing but expenses. Why you may ask? Because it was a predictable outcome. Math and probability say so.
Let’s start with the unlikely assumption that your AdWords campaign was structured and setup properly, (more on this in later posts) and that it is a flawlessly strategized and executed campaign. It reasons that it would yield positive results, NOT.
So, what gives? Math and probability. Here Goes!
The math behind search, like all things, is not uniform, it’s random and chaotic, however Google AdWords is a platform based on uniformity, and there is a good reason for that, it benefits Google.
The downside is, it handicaps everyone else. We can’t predict with any certainty that a “real” search for a product or service will be typed at any point in time, or on any given day. AdWords campaigns certainly let you set the time of day, and if you spend enough time managing your account you can pick windows of time to increase your odds of winning, but it’s still a game of chance. Why is that? Because on average, out of every 100 clicks there are 2-5 real potential clients, that’s by the numbers the industry touts, the self-serving industry. Our experience has been it’s more like 1-2 at best. In many industries, if you could guaranty the one click was yours, it would still make sense to spend the 35 bucks per click to get the 1 buyer…but that means at 35 bucks x 100 clicks to get the one buyer, the cost for that client acquisition is 3500 bucks.
If you are selling 2.5-million-dollar timber frame homes it makes sense, but mold removal, roof repair, or mini-ductless split replacement, not so much.
So, the first mathematical challenge we have to overcome then is our best-case scenario, and that is we assume we will, out of all of the ad options to choose from, get the 100 clicks which we assume has the 1-2 clicks that are buyers. That being the best-case scenario, does the math work for us, 100 X CPC. Oh wait, that’s not all we need to know. Of the 1-2 buyers in that group what are they buying? What if the sale we get is small potatoes, and not large potatoes? Would that work? If we take water damage restoration as an example, a small mold job might be 700-1200 dollars, or a small water damage call might be 2500 dollars. The CPC for a water damage click is somewhere between 113-120 bucks a click. 100 clicks X 120 bucks a click, and that customer may have cost you 12K in Google expense. We haven’t even added in the service fee you might be paying to manage your AdWords campaign yet either. Point is, you might get one or two calls yielding revenue of 2500-5K with a cost of 12K plus management fees.
So maybe that wasn’t your best-case scenario, if we throw lady luck into the picture you may have gotten the 1-2 clicks before you had to buy all 100, let’s say you got them after you bought 20 lousy ones because this month you were lucky. The math there goes like this, 20 clicks X $120 cost per click, with a total cost before management fees of 2400 bucks. If we get one customer that drove $1200 in revenue still a huge losing battle, if we get two at a total of 5K in revenue at 50% margins we might break even without management expenses. Getting the two clicks after just 20 clicks are in the door when the average is based on 100 clicks, seems like long odds in and of themselves. But what if we wound up on the other side of the average? How bad would that look? Let’s see.
Like with everything, we could be lucky or unlucky, we saw what luck brought us, let’s look at what unlucky brings us. Let’s say we needed 180 clicks to get the 1-2 orders in a given month. 180 clicks X $120 per click is a cost of $21,600. Ouch! $21,600 in expense to drive 2500-5K in potential revenue, that’s not good odds at all.
What about the needle in the haystack? Yes, the all elusive, $30K water damage call that you close once in a blue moon, what would that look like? Well, we know they don’t come along as often as the average water damage job that runs 3-5K in this space. This requires a lot of luck.
By now you know the math. What we don’t know is how often we will have the opportunity to come across the large loss. Let’s see the math.
At the average of 100 clicks
100 clicks (x $120) cost per click
Cost to get the 1 job $12,000.00
- $15,000 margin at 50%
- $12,000 cost of google clicks
- $3000.00 management of PPC program
Net margin $0.00
Now if we get lucky (best case scenario)
We got lucky and got it at 20 clicks
20 clicks X 120 cost per click
Cost to get the 1 job $2400.00
- $15,000 margin at 50%
- $2400 cost of google clicks
- $3000.00 management of PPC program
Net Margin $9600.00
Now with a little bad luck
Bad luck and it took 180 clicks
180 clicks X 120 cost per click
Cost to get the 1 job $21,600.00
- $15,000 margin at 50%
- $21,600 cost of google clicks
- $3000.00 management of PPC program
Net Margin $9600.00 LOSS
Summary of needle in the haystack:
In looking at the needle in the haystack scenario we made some assumptions that are considered the absolute best case, best in class program, and the most luck.
- We have a properly crafted and properly strategized and managed PPC campaign (almost never happens, and how would you know)
- We assumed we would get the needle in the haystack in the first month or each and every month
- We assumed we would be willing to spend big to get to it, all 180 clicks if need be, 20 if lucky (in 99% of the clients we speak to they are not willing to spend what it takes to get there)
So, in the most ideal scenario, with a needle in the haystack methodology we had a risk profile that had a small possibility (with a lot of luck) that we made $9600.00, but a more likely scenario that we were somewhere between break even and a $9600.00 loss. In simple terms, if we consider best case scenario you would wind up at no better than break even to a 10K loss 66% of the time, and somewhere between break even and a 10K gain 33% of the time. So, for this scenario, your risk is still high that you will lose money under the best of cases.
But is this the best-case scenario? No. This is a theoretical best case, unfortunately reality has a hand. You are most likely looking at this next best-case scenario. As you can imagine, It gets much worse unfortunately.
The Right Assumptions to Make When Looking at an AdWords or PPC Campaign and it’s Ramifications for Your Business
Proper Assumptions (almost)
- We still think we have a properly crafted and properly strategized and managed PPC campaign (almost never happens, and how would you know, more on a later post)
- We don’t know where the buyer is in terms of time of day, day of week, week of month or month of year.
- We are still willing to spend big, we will spend what it takes to get that one big loss buyer
If we look at point 2 above, we see where the most critical math probability challenge lies and the one thing that is at the heart of why PPC campaigns fail or at least fail in meeting expectations and ROI goals.
If you were to look at a statistical scatter plot or heatmap of a search and click profile for a segment of google search, it would be completely random, we can use the word chaotic because that’s what the math of life is, unpredictable and chaotic. It’s all based in math.
The reality is we don’t know where that buyer is. With thousands of clicks a day in multiple segments for your business, all going on every hour of every day, you might have to buy hundreds and hundreds, maybe even thousands of clicks in order to get that sale. We constantly analyze PPC accounts that go into hundreds and thousands of clicks to get a sale. Let’s say you do get lucky in month 1 (beginners’ luck) and get the sale after 20 clicks. But then you go almost 8 weeks until the next one. What would that look like?
We know PPC campaigns are typically sold and managed in time periods that are months not weeks.
Month 1 Closed One
We got lucky and got it at 20 clicks
20 clicks X 120 cost per click
Cost to get the 1 job $2400.00
- $15,000 margin at 50%
- $2400 cost of google clicks
- $3000.00 management of PPC program
Net Margin $9600.00
Month 2 Didn’t Close One
180 clicks
180 clicks X 120 cost per click
Cost to get no job in clicks
$21,600.00 in google click cost
- $0.00 margin at 50%
- $21,600.00 cost of google clicks
- $5000.00 management of PPC program (as spend increases so does management costs)
Net Margin Loss $26,600
Month 3 Closed One
180 clicks
180 clicks X 120 cost per click
Cost to get job in clicks
$21,600.00 in google click cost
- $15,000 margin at 50%
- $21,600.00 cost of google clicks
- $5000.00 management of PPC program (as spend increases so does management costs)
Net Margin Loss $11,600
90 day running margin tally?
9,600-26,600-11,600 or
Net Margin Loss $28,600
So, What’s Really Going on Here?
It’s all about probability, we should have all paid attention in school, we might have saved ourselves a lot of time, money and aggravation.
The reality on AdWords PPC campaign results is that nobody can predict at what time, day week or month of the year the buyers click will come, after all it’s the buyers click we need not the tire kickers, not the people with nothing better to do then browse the web for information on how they can do something or make something themselves. Some months the clicks are in clusters, some months they tend to be certain time of day, certain days of week, etc. it’s fairly random. The point here is, if it’s random, you have to be present for each and every search that takes place in order to guaranty a reasonable, consistent opportunity at getting the click from not only the tire kickers, but the buyers as well.
Let’s take this one step further and consider the most likely scenario that you won’t spend whatever it takes in your area to show up number 1 in the Google ad section each and every time during the month.
After all that would exceed our scenario above, could be as high as 50-100K a month for a regional damage restoration or roofing contractor. Look at those numbers and the word PPC will never leave your lips again. There is a second scenario however, they are lying by omission. It’s true, you can make money with AdWords, everyone can, but we agree in general with the market that PPC can be a great winning and profitable strategy.
So, you won’t spend tens of thousands of dollars, nobody does, let’s say you spend 2K in total. Let’s call it $1500.00 for ad spend and $500.00 for management. If the clicks cost $120.00 per click then you can buy 12 clicks for the month give or take. In a small area, that would last about 3-4 hours of one day. The chances of you getting that one buyer are so small it’s statistically zero. In fact, the average it takes to get the one buyer is 100 clicks, we looked at getting lucky at 20 clicks, and now we are at 12 clicks, that’s damn, damn lucky. You could go months and months and months and always miss the buyer. Even if you could buy more clicks with great optimization maybe you get to 2-3 days’ worth of clicks, but out of 30-31 days, the odds of hitting the few big buyers are slim to none. In fact, the odds of hitting a buyer period are slim.
The Random Wins are Costing you a Fortune as Well as Future Progress
But then there is lady luck. We all get lucky sometime, some more than others. We hear it all the time, PPC customers coming to us saying it is working but only every once in a while. They make the assumption that if it worked once, it can be tweaked to work all the time, after all that’s what they hear from the AdWords companies, we just need time, time to tweak, adjust, etc. While that’s necessary to optimize the number of clicks your money can buy, it doesn’t solve the probability challenge, there is only one way to solve that, buy every possible click, and gather all of the buyers in that pool, (and hope your salespeople can close them (more on that another day).
But what if, in a limited budget scenario, it really is just luck, and that it works only every once in a while.
The proper deduction from the facts would tell you that it doesn’t work most of the time. So, the next time you find yourself making excuses for why it isn’t working, don’t, the few bright moments by the math, are simply pure luck. You can’t make business decisions counting on luck each and every day of every month, luck doesn’t work that way.
What’s the Deal, is Everyone in the PPC Market Lying and Cheating? Well Not Really, Unless You Consider Lying by Omission Cheating, or Maybe They Themselves Simply Don’t Know Enough. Which is Scarier?
The problem with AdWords providers in general, is they are merely certificate holders in how to setup PPC campaigns, they get certified by none other than, the people that are charging you for clicks, Google. Of course, they aren’t being taught about the mathematics and probability as it pertains to PPC campaigns, how would that benefit their companies, or Google itself for that matter? Simply put 34 of the market would not invest in PPC over organic search (SEO) if they knew, and understood, the math and probability behind their campaigns. At the end of the day, some of these people don’t know, what they don’t know. This is one possible scenario for the “ways” of the PPC marketplace. There is substantial lack of knowledge when it comes to running AdWords campaigns.
This is scary enough, many of the companies everyone is giving their hard-earned money to, just don’t know what they are doing.
There is a second scenario however, they are lying by omission. It’s true, you can make money with AdWords, everyone can, but we agree in general with the market that PPC can be a great winning and profitable strategy. Sometimes. So, they are selling you a good product, no doubt about that, but what they are not telling you is what you have to do, and what they have to do, to make it all work. Here it is.
if they hit the mark 100% in their strategic campaign work, you must be willing to spend everything it takes to ensure you get the buying clicks that are randomly dispersed throughout the click pool. 99% of the clients out there, including you, would never be willing to spend the total amount it will take to have consistent positive results due to the risk associated with that spend in the short to mid-term. In the damage restoration space that could be $20-100K per month with losses that span months until the probability odds catch up in your favor. If you can weather the storm, you will have a winning campaign, well you could have a winning campaign.
So What Can You Do When it Comes to Potentially Hiring an AdWords PPC Company to Manage Your Campaigns (If you still insist)?
We always recommend that customers ask their potential AdWords vendors what the cost is to theoretically own 100% of the clicks? Alternatively, what would you have to spend to ensure a positive ROI, then be prepared to hold them to it. Don’t ask them if it’s going to work, ask them what it will take to make it work. Let them put the noose around their neck. Then watch them closely. But remember, this is a long game, because even though your ad shows up right away at the top, which is why everyone loves PPC, you have outlast the odds. You have to be willing to spend every penny until the deals come. But this isn’t how most people manage their PPC campaigns, and that’s why they don’t seem to work. It’s like expecting your car to drive all across the country on one tank of gas, it’s just not happening, you have to keep filling it up until you get there. In this case “There” is not a place, but an aggregate of orders that returns a positive ROI.
Calculate Your Own PPC RiskReturn Profile
If you want to calculate your specific odds of a positive return you can use this formula. You can make your own assumptions about buyers per 100 clicks, but a safe bet is 1-3. Don’t forget to use realistic average sale numbers, and average margins. Here being honest with yourself is key, manipulating the numbers serves no purpose other than to convince yourself of the lie.
You can use a variety of tools to get the average cost per click for the products and services you offer, Google has a keyword planner that gives you these costs.
Formula
(how many clicks to get an order) X (how much per click) = total cost of clicks
(total cost of clicks) + ad management expense = total cost of ad campaign
(average sale price) X (margin percentage) = margin
(margin-total cost of ad campaign) = return
When running these scenarios, run several, a best, better, good, and poor scenario so you have something to base decisions on. Again, the most likely campaign is a best scenario every once in a while, an average one most of the time and then some really bad months to top it off. It’s the return or loss at the end of a month’s long campaign that matters, not that you hit it big one month here and there, at the end of the day, and in most cases, they will be losing campaigns.
In Closing
When we are advising clients on whether to utilize PPC as a marketing strategy we look at few simple things, and that will determine whether or not it should be considered at all.
- Is the average sale a large ticket item
- Cost per click across the industry segment has to be extremely low when compared to the average cost of a sale
- Are you willing to spend it all to ride out a lot of losing months to get to the buyers. Remember you may hit it early with luck but over time the odds are it will take you some time to find that buyer, or those buyers.
- Do you have confidence in your sales team that they can close the few buyers that come in, in a competitive environment? (remember you get 1-3 chances of every 100 perhaps, if they blow it, then you may have to wait 20, 100, or 180 clicks more to get another bite at the apple.)
- If you use a higher conversion rate per 100 clicks than make sure you look at your average job price in terms of revenue, mix it up to match what the real-world scenario would be. You find the equation has a worse outcome.
Here is an example of where this strategy may or will work
You are a timber frame custom home builder, and the average home sales price is 2.5 million, with some going as high as 6 million. Your net margins average 28%. There aren’t that many buyers each year hunting builders for high end custom timber frames, but lots of shoppers looking for info. On top of that there are millions of searches a month for things that have to do with timber frame homes that are so close to building one that you will inevitably have to buy some of those clicks as well, even with the best negative keyword strategy in place, you are still going to have to accept some.
Here is how this would look with a 12-month campaign
Number of Potential Clicks Per Month in Region 4-10K (let’s use 4K at low end)
Average Cost Per Click $3.50
Number of months until a client signs on for a project: 10 (this was a real-world case)
The Math
4000 X 3.50 per click = 14K
Management Fee for Ad Spend $5K per month
Per Month Spend $19K (aside of the internal costs of fielding calls and responding to requests)
Lot’s of questions, lot’s of tire kickers, lot’s of bounces, until month 10, than one of the clients commits to a 4.5 million dollar project.
10 months at a cost of $19K per month = $190K before the first deal signs.
Then they go 2 more months without any more contracts at a cost of $38K
Total 12 month spend is $228K.
They took the deal at 4.5 million, they net 28% because of the type of specialty they offer. That yields them a $1,260,000 profit against a $228K spend. That’s a hell of a return!
But they had to endure the 10 months at 19K, or $190K spend without the certainty of a contract.
Sure, they could have gotten that at month 4 or 5, and that would have been even better, we know that’s possible, however the odds always catch up to you and they could have gone another 12 to 14 months before seeing another. Nobody ever stops after an early victory, and so it goes, that the odds always catch up with you.
The lesson here is, if you can afford to buy each and every click available, and you have the stomach to weather the storm in terms of constant spend with no, to very little return in the short to mid-term, and you have a high dollar product with a decent profit margin, and the average cost per click is reasonable, you can make a killing with PPC. It’s why we love it, but only in cerain cases.
However, when it comes to most businesses, those stars won’t align.