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Google’s Chief Economist, Hal Varian, explains the AdWords Ad Auction and how your max Cost Per Click (CPC) bid and Quality Ccore determine how much you pay for a click on Google.com.

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Most Burning Question:

What is considered an acceptable ROI from Google Adwords?

Your question is a little broad. I’m not sure what you are tracking as far as conversions go… So, I’ll give a broad answer about ROI.

I’m going to assume we are talking about Return On Investment and it will be measured as dollars out for dollars in. This allows us to create a ratio for an answer, and gives us 3 broad categories of response.

Note: The help page at Google uses percentages. That’s the same as the ratio multiplied by 100. I like the ratio because 3 to 1 tells me I make $3 for every $1 spent.

ROI is great than 1 – Any ratio greater than 1.0 means for ever dollar you spent, you made more than a dollar back. This is a good thing. Now, this is measured in raw dollars, so may not indicate you actually made a profit. You could choose to measure using net dollars to be more accurate.

ROI is equal to 1 – This means you are at a break even point. Dollar in gets a dollar out. If you are just starting out, this just means your advertising is doing something right, but you need to test more to find what will actually make you more money than you are spending. Google adwords is the IDEAL platform for testing, and as a rule-of-thumb you should ALWAYS be split-testing 2 ads. Always try to beat your best ad.

Now, if you had an ROI of 3 and it suddenly dropped to an ROI of 1, then I would say you have a problem and better give it your focus immediately. It may be time to pull the plug on those ads or the keywords. You’ll need to do your homework to figure out what the issue it.

ROI less than 1 – This is not where you want to be, unless you are just getting started and haven’t yet figured out the right combination of ad/landing page/keywords to get your conversion rates up. When in this zone, you’ll need to do everything you can to get it in positive territory, or pull the plug on it.

Now, back to your question… Acceptable ROI can be very different for each business, and very different by keyword-phrase. I’ve seen some adwords ads get ROI’s of 30 and higher, but they are low traffic keywords. And for the same client, some ads will get only ROI of 2, but they have huge traffic and the client knows that once people buy once, they will buy again within the next 2 years so as long as the ad doesn’t lose money…. they are happy.

Another way to go about all of this, and one that I think is actually even more useful, is to know what you can spend to acquire a new client or customer. This requires you know the lifetime value of an average customer. You can get this by adding up all your revenue and dividing by total number of clients/customers.

So how is this useful? If I know I make on average $1000 for every customer I get, and I know my costs not including advertising are $200 per customer on average. That leaves me with $800 to play with. I decide I can live on $600 and so can then spend up to $200 to acquire a customer.

When you know that number, you know what your options are for advertising and marketing.

There is an article here on my blog that goes into more detail on important numbers for your business. It’s called

The 5 Most Important Numbers For Effective Hypnotherapy Marketing

I also have an article here on my blog about using Google Adwords. It’s called

9 Quick Tips For Using Google Adwords

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