Paid Search Advertising Brings Quick Profits, Narrow Margins

Paid search advertising via Bing, Google and other search engines is an easy path for driving audience, revenue and ideally some profits.

But sites often don’t make big profits that way because they underestimate the amount of labor involved on top of the actual ad costs.

And then there is the issue of return on investment from paid search advertising.

What happens when a visitor reaches the site? Do they generate enough sales to make the campaign worthwhile?

Even higher profits are potentially found via search engine optimization. That assumes the site manager carefully tracks the amount of time required to build and maintain SEO. The audience from SEO efforts doesn’t cost a dime in hard cash.

Again, it’s only the labor from SEO that costs anything.

Defining Ad Campaign Profits

An ad campaign typically has two costs — the labor to manage the campaign and the cost of the ads.

The campaign labor is either internal or external. In other words, the business can outsource campaign management.

If a business has people with the skills and experience to manage the campaign internally, the labor cost is lower than outsourcing it in most cases.

If the business doesn’t have that level of skills and experience, it makes more sense to outsource it. Trying to do it internally will take a lot more time. Inefficiencies come with a lack of knowledge.

The cost of the paid search campaign rises with the size of the budget, especially if the campaign is using cost per click ads from search engines. A larger budget usually means more keywords are necessary to fulfill that budget. Keyword bidding ebbs and flows with demand. Targeting effectiveness requires fine tuning on an ongoing basis.

At the receiving end of the campaign, marketers often measure results in terms of revenue, i.e., site ad revenue, ecommerce transaction, etc. They also might be measured in other ways depending on the type of the business.

Either way, it is important to create measurable and quantifiable goals for the campaign and the business, which leads to an understanding of margins.

Paid Search Margins

If a site manager pays 10 cents a click with Yahoo! and gets back 20 cents from every visit, the gross profit is 10 cents or 50 percent of revenue. But does the site manager estimate the time that is required to manage the Yahoo! account?

If a site manager is paid $40 an hour and spends a great deal of time managing the Yahoo! account, that profit of 10 cents a click could get wiped out quickly.

Likewise, some Web managers trumpet the fact that they get, for example, 20 cents from every visit without paying a dime to get that traffic and revenue. However, SEO is a highly labor intensive effort — arguably more so than search engine marketing — and the time required also could easily wipe out most if not all of the gross profit.

So using the definition above, a simple definition of profit is Results / (Labor + Ad Costs).

A study by Nielsen several years ago found that online advertising had a 200% return on investment — in other words, $200 in revenue against $100 in costs.

Flipping the formula on its head, the average cost is 50% of revenue.

It remains up to the business to decide the minimum ROI it is willing to accept for paid search advertising versus other options and uses of time. But for many businesses, getting a 20% return these days may sound very attractive.