Beware of the Cost-Per-Click Trap

Most web marketers bid on CPC search engines out of desperation.

When I first started selling retailing online in 1999, it was easy. I had very little competition and search engines could be easily manipulated to provide lots of free traffic. Online success is much harder in 2007 for two primary reasons.

First, the low barrier of entry means that competition is fierce in practically every possible niche. Secondly, while in the past, many of us capitalized on free traffic from search engine optimization, that strategy is much less dependable today and is quite resource-intensive. For many markets in today's online environment, the most dependable way to generate traffic is PPC campaigns with major search engines.

In fact, in many niches, it is probably the only way to generate significant business. Predictably, the shift from organic SEO to PPC has been quite good for the search engines, but not so good for the advertisers. However, the greatest enemy of PPC advertisers is not Google-it is lack of marketing sophistication among the advertisers themselves.

Very few PPC advertisers could venture a good guess as to how much they should be spending per click on a specific search engine. Unfortunately, this lack of sophistication always leads to overbidding. If my competition is overbidding, I have a choice-jump in and commit suicide along with them or sit on the sidelines.

Neither choice is appealing, so in many ways, my business is hurt by competitors' lack of sophistication. I wish I could teach my competition a few things about PPC-even my largest competitors need some serious help. I would rather make money myself rather than just watch them shovel their money over to Google. Calculating your breakeven PPC bid is not difficult. You simply have to calculate the average profit per visitor before advertising expenses.

If you want to take a bit of risk and you have a healthy cash flow, you can base your breakeven PPC bid on the lifetime value of a visitor rather than just the value of the initial order. Ideally, you want to run this calculation for every PPC keyword you bid on and every search engine it is run on.

Your breakeven PPC bid will be different for Google traffic than Yahoo traffic. While this sounds like a lot of calculations, there are plenty of tools that will help make this quite easy. In my industry, I often see my competition bidding more than $1 for a keyword with the hope of selling a $10 product.

Our top bid is usually only a fraction of that and will be based on what an average visitor from that traffic source is worth to us-probably well less than $0.50 in lifetime value. Perhaps my competition can justify their astronomical bids, but I doubt it. From our research, our conversion rate is among the highest in our industry, and conversion is the most critical factor involved in determining a breakeven bid.

As I have watched numerous competitors start and ultimately fail over the years, they all have had one thing in common-they bid too aggressively for traffic. Unfortunately for us, as fast as one unsophisticated competitor fails, we see another one bidding above us.

Over time, I have no doubt that PPC bids will drop considerably as more advertisers get smarter. Incorporating smart bidding into your advertising strategy will help ensure that you will be around to see the day when bidding for the top position actually is profitable again.

About the Author
Greg Howlett is an online marketing expert with years of internet marketing experience. Visit his site at Vitabase.com.