Understanding the cost of Google Ads can be a complex affair, but it’s crucial for small businesses seeking to maximise their digital marketing efforts. In essence, the cost is not just about how much you spend, but how effectively you spend it.
The Auction Process
Google Ads operates on an auction system. This is not a traditional auction; instead, it’s a split-second process that determines which ads appear for each search query. When someone searches on Google, an auction is triggered if there are advertisers interested in showing ads related to that search query.
Advertisers select keywords and set bids for these keywords, indicating the maximum amount they are willing to pay for a click on their ad. However, the highest bidder doesn’t always win. Google also considers the quality of the ad and its landing page. This is where the Ad Rank comes in, which is a combination of your bid amount, ad quality (including expected click-through rate, ad relevance, and landing page experience), and the context of the search.
Cost-Per-Click (CPC) is a familiar metric in Google Ads. It represents the actual amount you pay for each click on your ads. This amount can vary depending on the competition for the keywords you’re targeting and the quality of your ads. Importantly, you often end up paying less than your maximum bid. Google will charge you just enough to outbid the competitor ranking below you.
Why Cost-Per-Acquisition (CPA) Matters More
While CPC gives you a good idea of what you pay per click, it doesn’t necessarily reflect the effectiveness of your campaign in terms of achieving your business objectives. This is where Cost-Per-Acquisition (CPA) becomes a more significant metric. CPA measures how much you pay to acquire a customer, not just a click.
For example, if your ads receive 100 clicks at a cost of £2 per click, you spend £200. If out of those 100 clicks, 5 result in a sale or a lead, your CPA is £40 (£200/5). CPA helps you understand the real return on your investment, aligning your spending with actual business results.
Examples in Action
Let’s consider a hypothetical small business, ‘ABC Widgets’, using Google Ads to drive sales. If ABC Widgets sets a maximum CPC bid of £3 for the keyword ‘durable widgets’, they will compete with other advertisers for that keyword. However, due to their high-quality ad and an excellent landing page, they might only pay an average of £2.50 per click.
If their campaign leads to a 5% conversion rate, meaning 5 out of every 100 clicks result in a sale, their CPA would be £50 (£2.50 * 100 / 5). If each sale generates £100 in revenue, then spending £50 to acquire a customer is profitable.
Understanding Your Profit Margins
A critical aspect of determining the profitability of your Google Ads campaigns is understanding your profit margins. Knowing your profit margin for each product or service is essential in assessing whether the cost per acquisition (CPA) is sustainable and profitable for your business.
If your CPA is higher than your profit margin, you are losing money on each sale or lead generated. For instance, if your product sells for £100 with a profit margin of £30, and your CPA is £40, your Google Ads campaign is not profitable. Therefore, it’s crucial to have a clear understanding of your profit margins when setting up and evaluating your Google Ads campaigns. To aid in this process, we offer a range of calculators on our website, which can help you work out your profit margins and assess the profitability of your Google Ads campaigns. These tools are designed to provide valuable insights, enabling you to make informed decisions and optimise your advertising spend effectively.
View our handy calculator tools here!
The cost of Google Ads is not just about the amount spent on clicks; it’s more about how effectively that spend turns into business results. By focusing on CPA and optimising for conversions, businesses can better gauge the real value they are getting from their Google Ads campaigns. Remember, the key is not to spend less, but to spend smarter.