Shouldn't advertising pay for itself?

I have read and hear lots of talk about ROI and the percentages and all that stuff. But I have a question about it.

(the following numbers are made up to protect the innocent)

If I spend $500 dollars on adwords in any given month, I should be making all of that money back right? So if I have a - say - 50% markup - I should be able to sell $1000 off of any advertising I do. Is this correct?

Yes, you're correct. If you spend $1 on advertising you should make at least $2 to remain profitable.

Keep in mind that there are a lot of expenses that might not be taken in account when you figure out how much it really costs you; including web hosting fees, web design fees, your time to make a landing page, your time to add keyword to Adwords (and your time to set it up and maintain it), etc.

Thank you bhartzer.

Thats what I thought. How, then, am I supposed to know that a given advertising campaign is working? I am using a tracking option to track anything from my google adwords, but how do I know that someone sees my link but does not click on it? That needs to, somehow, be factored in but I don't know how.

Also - how do I seperate organic listings from all possible ppc campaigns? - I mean the tracking of hits/orders? It seems that there is so much to know and do - it almost seems like paying someone else to do might be better. But then there's those costs............ ugh.. why can't running a business be easy? :] -

You can separate PPC campaigns from organic listings by creating specific "landing pages" for each keyword.

How do you know that someone sees my link but does not click on it? It's hard to tell if they saw your PPC ad if it's not on your site.

An important subject also is return visitors. If a high percentage of your paid SE traffic comes back later, then you most likely would do pretty good.

I have found the key to be tracking everything, so that you can exactly track the ROI (initial & return visitors). We do that thru cookie and real time stats saved to db.

My basic rule for advertising/marketing dollars is that it should equal between 10%-20% of my budget. So if I spend $500, that should net me $2500-$5000 in new "orders".

That's just my rule of thumb.

Most companies spend 5 - 10% of gross sales on Marketing. The percentages do change slightly from industry to industry. Advertising online is just one component of a Marketing plan.

Here's a few things to consider.

1) Because a customer does not buy from you today, does not mean that they won't in the future. Many forms of advertising require repetitive impressions to establish your brand so when customers have a need for your products or services, AND they are ready to buy, you are the company that they remember.

2) What is it worth for you to acquire a new customer? Things that will help you answer that question are:
---How much does an avg customer spend?
---How often do they need to purchase your products or services?
---What's your avg gross profit per transaction?
It is quite possible that you lose money or break even up front. Take a look at some of the largest companies online --- they still struggle to be profitable.

Hope that helps some.

Also keep in mind how much of an order is actually profit. For example, one of our clients needs to have every advertising dollar result in atleast $4 in sales to be profitable. That is figuring in the cost of the product, the cost of the advertising, cost of employee labor that goes along with processing an order, etc etc.

Keensurfer, thanks for bringing out things in your second pointer.

sirduncan, here is a simple ROI formula:

ROI=((RE*CTR*CR*ASP)-TC)/TC

Where:

*Reach (RE) is the number of impressions/people reached by advertising and/or promotion.
*Click Through Rate (CTR)
*Conversion Rate (CR) is the number of people who made a purchase or took a desired action.
*Average amount of Sales per Person (ASP) is an average.
*Total Cost (TC) is the total cost of advertising and/or promotion.

For example, let’s say that Web site A spent $3,000 (TC) on a PPC advertising campaign. Ad impressions were 40,000 (RE), and CTR was 0.125 (5,000 clicks/40,000 impressions). The campaign’s conversion rate (CR) was 0.5, and the average amount of sales per person (ASP) was $500.00. ROI here would be:

ROI=((40,000*0.125*0.5*500)-3,000)/3,000= $415.67

As bhartzer mentioned, you will need to factor in other cost variables in TC, such as web hosting fees, web design fees, your time to make a landing page, your time to add keyword to Adwords, etc...in order to get more accurate figure. Don't be discouraged when you find it rather difficult to factor in all your cost...certain costs are, by nature, too difficult to assign to a specific campaign. The formula above can give you a good rough estimate ROI figure...which can be used to plan your next move.

You can give a forecasting a try also. Comparing an actual and a forecasted figure could provide you with more insights on your campaign(s) performance. I suggest Exponential Smoothing as it's very simple to apply; in exponential smoothing, recent observations are given relatively more weight in forecasting than the older observations. Thus more reliable than moving average.

how do I know that someone sees my link but does not click on it?

It's been a while since I ran an AdWords campaign, but I do recall that it shows the total impression of a given keyword(s) in your campaign. Some of that figure could, and probably are, be generated repeatedly by a same user...but at least, this could give you a rough estimation. But, as bhartzer said, It's hard to tell if they saw your PPC ad if it's not on your site.

HTH.

wow - thanks for the info folks... I realize that I still have a lot to learn about this whole online business idea, and yall have been very helpful.

I will take a close look at that formula and see what I find out with regards to my own company. I apreciate the information and will see what I can do. Thanks.