AdWords business analysis

It's one thing buying AdWords traffic from Google. It's an entirely different thing making money from it.

There are 3 steps you need to take to make sure you are profitable.

1. Measure your traffic cost per visitor
2. Measure your profitability per visit - see Visitor Value
3. Check that your visitor value exceeds you traffic cost

Google will provide you with the average visitor cost directly from your AdWords control panel. The figure you need to use is the CPC, or cost per click.

Measuring your visitor value is usually much more complex and depends on

• your average sales value
• your business margins
• your conversion rate.

You know, or at least you ought to know how much money you make from an average sale. You then need to calculate your profit per sale and multiply that by your overall conversion rate to find what your visitor value is.

Let's walk through an example.

Suppose you sell widgets for $50

These widgets cost you $10 so you profit it $40 per sale.

Suppose further that you have a 10% conversion rate. This means that one out of every ten people who visit your site go on to buy from you.

Your average visitor value is then $40 * 10% or $4.

If you can buy targeted traffic for under $4 you are going to make a profit. If you can get it for 20c you'll do fine!

So the first thing is to measure these key business numbers. If you find that you are making good money per visitor and your ads are ranking low, then increasing your bids will probably generate more traffic and increase your overall sales and profitability.

Note that many businesses make a mistake at this point and focus too much on Return on Investment or ROI, which is the ratio of what their advertising costs are to their profits. To see why this is a mistake click here.