Why This Company Should Avoid AdWords

by Adam Kreitman

AdWords boils down to math. And, sometimes, the math just doesn’t add up.

The following cautionary tale about using Google AdWords is true (though I’ve changed a few details to protect the identity of the company at the heart of the story).

It’s about a company using AdWords that shouldn’t be because, for their business model, in their market, the math ain’t in their favor.

There’s a catch here though. And it’s that there are other companies that CAN make the AdWords math work… in this very same market.

How?

Let’s take a look. Here’s the set up…

Last month I got a referral to a woman who’s been using AdWords to try to sell her product…a type of insect repellent. We’ll call it Bug Off Insect Repellent.

To be quite honest, there’s nothing particularly unique about Bug Off. The company makes no big, bold claims about it being any more effective than the competing products. Their main selling point is that it’s made of non-toxic materials and is completely biodegradable.

No Secret Sauce

While that’s great, there are other insect repellents that make similar claims.

And that’s Problema Numero Uno.

Bug Off has no truly Unique Selling Proposition. The product simply isn’t doing or offering anything that’s not already out in the marketplace.

It’s got no secret sauce. Nothing to make it stand out from the competition. They’re not even offering a strong guarantee.

And that’s a tough position for any business to be in.

That said, the company is generating some sales. Mostly through small retail brick and mortar stores as well as an ecommerce store they’ve partnered with.

The rest of the sales are coming through AdWords (or so they think).

And that’s why they came to me…they wanted help optimizing and managing their campaign. But I turned them down.

Here’s why:

First, they weren’t equipped to sell on their website. They’re driving people to their website and, from the site, linking to their product on Amazon.com where people can buy Bug Off.

No Accurate Tracking

The owner said they were averaging about a sale a day on Amazon. However, when pressed, she really didn’t know how many of those were from AdWords vs. how many were coming from people finding them through the Amazon site itself.

That’s Problema Numero Two. You gotta be tracking this stuff so you know what’s putting the dinero in your bank account. You can’t improve your marketing and sales funnel if you can’t SEE the funnel.

But the biggest problem this company had, Problema Numero 3, is all about the math.

Low Profits + High Click Costs = Bad News

We started talking about profit margins and the owner told me that they make about $8 profit per bottle sold. Digging a little further, she told me that their average cost per click on AdWords was $2.60.

BIG red flag.

To make the math easier, let’s say I came in and immediately got their AdWords cost per click down to $2.00.

At a profit of $8 a bottle, that means that 1 out of every 4 people who click on their ads – 25% – would have to BUY a bottle of insect repellent just for this company to break even!

Now a 25% sales conversion rate for a company WITH a Unique Selling Proposition that sells directly on their own site would be a challenge.

But there’s just no way Bug Off could expect to convert at that level.

The numbers just don’t add up. Even factoring in a few customers becoming repeat customers and/or buying multiple bottles at a time, this company has little chance of running a profitable AdWords campaign.

When You Can Afford To Sell at Break Even (or a Loss) in AdWords

That said, there is a way to get the numbers working in your favor when you can’t make money on the initial sale.

It’s why Amazon.com, Zappos.com and other big companies can afford to bid up prices in AdWords advertising products they’ll lose money on.

And it comes down to their back end.

See, Amazon (if they wanted to) could pay $2.60 a click to promote Bug Off and lose money on every bottle they sell through AdWords.

Why?

Because Amazon is not about making a profit on the first sale. Amazon is all about the LIFETIME value of a customer.

I came across this quote the other day about Amazon’s business model…

“A business model that not only valued long-term cash flow and absolute profit potential, but also deemed near-term profits and profit margin largely irrelevant.”

This is a model/concept that many businesses don’t understand. And it’s the key to making money in AdWords (or, other marketing channels, for that matter) in very competitive and/or low profit margin markets.

It basically comes down to this… the success of your business is NOT determined by whether you make a profit on the first sale to a new prospect. It’s determined by the LIFETIME VALUE of that prospect.

If you have a strong back end and can effectively cross sell and upsell additional products and services to your existing customers, then you can afford to break even or lose money on their initial purchase.

This is why Amazon could, if they wanted to, afford to pay $2.60 a click to market Bug Off through AdWords.

Because when someone clicks on the ads and decides to buy Bug Off, Amazon’s got thousands of other things to sell them. And Amazon’s going to VERY strategically present them with a number of related products to buy.

So maybe they add Bug Off to their Shopping Cart and are presented with an Insect net for $35 that would be perfect for the picnic they’re planning with their family next weekend.

Decide Bug Off’s not for you? Well, here are 50 other types of insect repellent you might prefer.

And speaking of that picnic… while you’re on Amazon how about some sunscreen, a soccer ball for the kids to play with and that awesome cooler that’s got a gazillion 5 star reviews to put the food in?

And, oh, it would be awesome to have a Kindle to bring along to read in the shade and….

Even if the person only purchases Bug Off and nothing else, Amazon’s email marketing juggernaut will kick in and send the customer follow up emails with related products.

Bug Off, however, sells just one product. They’ve got no back end. No cross sells or upsells.

And because the lifetime value of a customer is so low, Adwords ain’t gonna be profitable for them selling a few bottles of insect repellent here and there.

So, my advice to Bug Off was this…

Don’t waste their time and money with AdWords. Unless they’re going to develop a whole line of additional products (or services) they could offer to clients, the numbers just don’t add up.

The better bet is to focus their efforts on getting Bug Off into more brick and mortars and ecommerce sites. This way the company itself can focus on selling Bug Off by the CASE to retailers and then let the retailers sell the bottles onesie, twosie at a time to consumers.

(Which, by the way, is exactly what SC Johnson does. They don’t sell Off! Insect repellent on their website. And they’ve got millions of dollars they could spend trying to do it.

Instead they spend their time promoting Off! to the public and drive people to retailers (online and offline) who handle the actual transaction with the consumers.)

AdWords is all about the numbers. And, many times, the numbers just don’t add up to make a one-time sale profitable. If you have to be profitable on that first sale then, especially for low profit margin goods and services, AdWords may not be for you. Better to try your luck elsewhere.

BUT…if you can get repeat customers…if you are effective at getting people to take advantage of your cross sells and upsells…if the lifetime value of a customer far exceeds the purchase price of that initial sale…

…then the numbers can work in your favor and you can make money on keywords your competitors can’t.

What would your advice to Bug Off have been? Do you see a way they could profitably sell bottles directly to consumers? Share your thoughts in the comment section below.

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