How to Calculate the Value of a Keyword

December 2nd, 2010

When you’re going head to head on an expensive keyword, you absolutely need to have your calculations down.  I’m going to look at an expensive keyword like, “fax online” and talk about whether you should bid on it.

Google keyword tool estimates “fax online” costs $9.88 per click. That’s expensive. In reality, if you calculate the history of the ad, positioning, relevance and a lot of other factors, the price may be higher or lower. But, lets start with that metric.

Let’s calculate for eFax and MyFax.

1. How much do the plans cost?
MyFax is #1 and their basic plan costs $10 / month. eFax is #2 and its basic plan is $16.95 per month.

2. How many clicks does it take to get a purchase?   This is known as a conversion rate.
Assuming both take 5 clicks per purchase, a 20% conversion rate (which would be extremely good) that’s $49.40 per customer acquisition.

3. How long do you retain each customer?
MyFax would need to retain its customer  5 months to break even. eFax 3 months.

To figure out whether something is worthwhile, you need intensive metrics. If you have a lot of volume and history, you can calculate how long until you profit, per customer, per keyword.

But, starting out, you don’t have that information. It takes several months for you to determine how long customers will continue paying for your service. So, an initial conversion rate has little meaning.

Consequently, for expensive keywords, you may have to spend several thousand dollars per keyword and wait several months before determining whether it makes sense. But, by then, your data maybe outdated.

Moreover, big companies don’t always optimize well. They can afford to unreasonably inflate the cost per click, beyond their actual value. You can’t.

There are a lot of things to consider when deciding how to spend you advertising money. But, AdWords isn’t the only source of traffic. The lesson is: think hard and never, ever spend money you can’t track.


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