Solving a Linear Equation to Advertise With Pay-Per-Click Internet
One of the primary ways of selling goods on the Internet is through
buying pay per click advertisements. For example, if you do a Google
search, you will get a page of results. On the far right and
possibly at the top of these results, you will see more results, but
they will more resemble advertisements than results because they are
in fact paid advertisements. For more information on how this
works, read at
Wikipedia - Pay Per Click. So if you are bidding $0.35 per
click on a Google ad, then every time someone clicks on your ad, you
are billed $0.35 . The hope is that when all is said and done,
you will, on average, make more than $0.35 per click in sales.
Searchengineguide.com, you might expect a conversion rate of about
6% (I averaged the low of 2% with the high of 10%). So if you
get 100 clicks, you spend $35 and make 6 sales. Now, the math
comes in: How much must you make on each sale just to break even?
Here's The Math
(6 Sales)*(X dollars/sale) = $35 or 6X = 35 which
results in X = 35/6 = $5.83 per sale. So, if you make over
$5.83, your pay per click venture is successful. If you make
less than $5.83, you lose money on each sale obtained through your pay
per click efforts.
But Wait, That's Not All!
In the previous paragraph, we assume that the $0.35 per click bid will
get you 100 clicks. If the market is very competitive, the
$0.35/click bid may not even get your ad listed on page 5 or page 6 of
the search results and you may only get 20 clicks per day. Let's
assume that you make $10/sale and you can get 40 clicks per day by
bidding $0.45 per click and you can only get 20 clicks per day with
the $0.35/click option. Which option is better?.
At $0.35/click * 20 clicks, your cost is $7 and your profit is 20 *
6% * $10/sale = $12.00 so your net profit is $5.00 .
At $0.45/click * 40 clicks, your cost is $18 and your profit is 40
* 6% * $10/sale = $24.00 so your net profit is $6.00 .
Will $0.55/click be better yet? Maybe or maybe not.
This depends on how many clicks you can get. If you only get 10
more clicks (50 clicks) than at $0.45, then your cost is 50 * $0.55 =
$27.50 and your profit is 50*6%*$10/sale = $30 so your net profit is
only $2.50. So if this were the case, it would make sense to stay at
about the $0.45/click rate.
There's Even More - Name Recognition and Repeat Visitors
A company might want as many visitors as possible, even if it means
the pay-per-click runs at a loss in order to establish the brand and
get visitors to bookmark the site and make repeat visits. The repeat
visits, after all, carry no pay-per-click costs. This is why the
large brand name items sold on extensive ecommerce sites offering lots
of customer services (like Amazon.com) are usually at the top of
the pay per click results. See
this search on "books".