Wednesday, May 12, 2010

Google's Conversion Optimizer

I discovered this video in response to a student question about how Google AdWords could guarantee a conversion ratio. The question came in response to a somewhat cryptic statement in the Google AdWords certification materials that the student, James Freed, references in his post. The short answer is that Google can't and doesn't guarantee a conversion ratio. Now, let me explain a little.

The real issue in search advertising is that you pay up front for clicks (that's why search advertising is called pay-per-click), but you only get paid when the visitor completes some action on your site. On average, only a very small percentage of visitors you pay for ever get to this point, typically on the order of 1–5%. Put differently, you're paying for a hundred visitors to click in order to achieve one to five sales on your site.

Three things should be obvious at this point:

  • If you're not making enough off of each sale to cover the number of clicks you have to pay for to make the sale, your return on advertising investment is negative, making the effort not worthwhile.
  • The resulting amount of advertising you can afford is going to be different for each and every product you sell. It will also differ by company.
  • You should therefore prefer to manage your advertising by cost per customer acquisition for each product versus cost per click for each visitor.

Google's answer to these observations is conversion optimizer. Essentially, conversion optimizer allows you to specify a target maximum cost per customer acquisition. Google then analyzes a myriad of factors in each of your visitors determining which ones matter for conversions on your site. It next alters your keyword bids (i.e., the maximum amount you are willing to pay for each visitor) to maximize the likelihood that you will get visitors more likely to convert into customers while staying within your budget. The frequent result is that advertisers using this tool both increase conversions and lower the amount they pay per conversion.

A few things to note:

  • You have to be using Google AdWords' conversion tracking tool and be getting at least 15 conversions per month to even use conversion optimizer.
  • You still pay per click. Google has not moved to a pay per acquisition model.
  • You still set your daily budget based on how much you're willing to spend on clicks.
  • Google does not guarantee it will hit below your maximum cost per acquisition since conversion depends on factors beyond Google's control. However, it appears that this tool is an honest effort to help advertisers manage to this metric.

On a final note, conversion optimizer focuses purely on the customer acquisition end of things. Far more significant gains can often be achieved by revisiting your website design and determining whether factors there are inhibiting your visitors from becoming customers.

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