| Tribal IM, 17th of March 2008
Those who manage Google AdWords campaign attempt to specify the campaigns as best as possible. But the success of a campaign is determined by the offerings on the site and the site itself. The better the product offerings, higher the conversion rate and the better the site is put together, the more sales and leads that will occur.
Supply and Demand meet on the website
Actually, supply must equal demand and both must be able to meet easily on the website. An AdWords campaign - which reveals the demand for a product on a site - will only be successful if the product offerings are also exceptional and the website functions optimally. For product offerings, it is not price alone that counts. Other factors also play a role, such as: the service the provider offers, the guarantees, delivery methods, confidence in the brand, payment options, etc.
Conversion rate as the key to success
The degree to which the product offerings are competitive and the website functions properly is reflected by the conversion rate. Actively managing this conversion rate is essential to bring the AdWords campaigns up to higher levels. The supplier with the best conversion rates can, after all, allow himself higher bids in Google.
Higher position: higher cost per conversion
Our experience is that the conversion rate of a campaign is usually independent of the position achieved in the AdWords results. In some branches, you do see a small shift in the conversion rate relative to the position, but in general, the success rate remains the same. Thus those high in AdWords rankings not only attract more visitors, but also achieve an equal proportion of conversions.
Increasing cost per conversion versus maximum cost per conversion
At a constant success rate and an increasing cost per click - logically - the cost per conversion also increases.
Many advertisers have a maximum cost per conversion in mind which they are prepared to pay per lead or realised sale. The cost per conversion is determined by the costs incurred by the advertiser in AdWords and the success rate of the site. Imagine someone pays €0,25 per click and the success rate is 1%. Then the cost per conversion is €25,00. Imagine also that this is the maximum cost per conversion the advertiser is prepared to pay. Then this advertiser also can not bid more than €0,25. After all, at a constant success rate, a higher bid leads to a high cost per conversion.
Superficial increase in sales
Imagine the advertiser from the example above actively manages his website and is successful in increasing his success rate to 1,25%. This not only has a direct effect.
If the advertiser previously had 10.000 visitors, that equates to 100 conversions (at a 1% conversion rate). At the higher success rate of 1,25%, this number immediately increases to 125 conversions.
An additional effect is that the cost per conversion decreases from €25,00 to €20,00. This cost
now lies under the maximum cost per conversion the advertiser is prepared to pay. Thus, this advertiser can now also permit himself higher bids.
Imagine the bid price is increased and the resulting click price is €0,30. There will be a relatively large increase in the number of visitors (parabolic effect) so imagine also that the number of visitors increases to 14.000. At a conversion rate of 1,25%, this results in 175 conversions.
Thus in this example, an increase in the conversion rate from 1,00% to 1,25% leads to an increase in the number of sales from 100 to 175. In addition to the direct effect achieved by the higher conversion rate, the advertiser also profits from the fact that he can reach a larger public thanks to the better position he achieved as a result of the higher bid price.
Marginal cost per conversion
It is now obvious to many advertisers to continually increase the bid price until a level is reached by which a maximum number of conversions are attained at an average cost per conversion equal to the maximum cost per lead.
Besides an average cost per conversion, however, there is also a marginal cost per conversion. In the example above, the cost per conversion dropped to €20. After the price increase from €0,25 to €0,30 per click, the resulting cost per conversion was €24 (14.000 x €0,30 / 175 conversions). However the marginal cost for these extra sales is more than €24.
This example is worked out in the table below. The extra costs for the campaign equal €1.700. In total, 50 extra conversions were achieved. Thus the cost for the extra conversions is equal to €34,00.
Therefore, the average cost per conversion is still acceptable, but the sales which were achieved without the bid price increase are also cannibalised. Thus the optimal bid price lies at the level where the marginal cost per conversion is €25,00, not the average cost per conversion.
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