Last Sunday I started advertising Preceden via Google AdWords. I’ve played around with it before, but never seriously.

I wrote a few ads, picked a bunch of timeline-maker keywords to target, set my daily budget to $3 (and a day or two later $10) and flipped the switch.

Week 1 Results

Impressions: 18,439

Clicks: 564 (3.06%)

Visitors: 548

CPC: $0.13

Cost = $72.16

Sign Ups: 3

Revenue: $87

Profit: $14.84 (21% ROI)

Thoughts

The variance of this whole process is extremely high. 3/548 is a 0.54% conversion rate. Good, bad… I don’t know. It seems bad, but I don’t really have a lot to compare it to.

The good news is that the campaign made money. Not much, but something. Had 2 people upgraded instead of 3, it would have lost money (-20% ROI). Had one additional person signed up, the return would be exceptional (61% ROI). This whole thing makes you appreciate how small improvements to your site, which in turn might convince a few more people to upgrade, can make a huge difference to your bottom line.

Next steps: Refine A/B tests, bump daily budget to $30, and see what happens.

Here are the keyword details:

I run a web-based timeline tool called Preceden and am about to start experimenting with AdWords to bring in traffic. What kind of ROI can I expect given my current conversion rates and price?

Let:

s = Conversion rate representing how many new visitors sign up for a free account

u = Conversion rate representing how many free account holders upgrade to a paid account

p = The price of the web app

c = The average Cost Per Click (CPC) for our AdWords campaign

For example, let’s say our CPC is $0.25, 25% of the new visitors sign up for an account, 4% upgrade to a paid account, and upgrading costs $29 (which is roughly my situation with Preceden, give or take).

First, we’ll calculate the Expected Value for a single user. If 25% of the visitors sign up for a free account, and 4% upgrade to a paid account, the overall conversion rate is 1%. So 1% of the time a visitor signs up and upgrades to a paid account and we make $29 minus the cost of AdWords ($0.25). The other 99% of the time the user doesn’t sign up or doesn’t upgrade their account and we lose the $0.25.  The Expected Value then is 1% * $28.75 + 99% * -$0.25 = $0.04. In other words, we can expect to make about 4 cents per AdWords visitor.

Our ROI is the Expected Value ($0.04) divided by the cost ($0.25) or 16%.

If these numbers are correct, then if we spend $100 on AdWords, we can expect to make $116. If we spend $1,000 we can expect to make $1160. And so on.

The last line simplifies it all a bit. The implications make intuitive sense: if we increase the conversion rates or the price, we can expect to make more money. If we decrease the CPC, we also make more money. Likewise, if we want to double our ROI we can either double the price ($29 to $58), half the CPC ($0.25 to $0.125), or double the conversion rate (1% to 2%). Which of the three do you think is the easiest to do?

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Over the next few months I’m going to work on measuring and optimizing Preceden’s ROI with eye towards maximizing its profits. I’ll provide regular updates — stay tuned.