It’s always a tricky part for the small ecommerce site owner. How much should I spend on advertising?

I’ve been doing some work in the last few weeks for a client, setting up some advertising for a client’s ecommerce site. A part of that was Google adwords. He’s operating in an extremely competitive niche, you need to pay at least $5/click to get in the top spots, sometimes more. Ouch!

So, at $5/click, is it worth even running the campaign at all? It’s pretty easy to work this answer out. Well, kind of.

The biggest question you need to ask is: how much is a new customer worth? For some sites, this is relatively easy to work out. If you are selling a subscription, or your customers tend to be single purchase (no repeat business) then you can probably work it out easily enough. If you do get repeat business, then it becomes a bit trickier. What’s the life time value of your customers? There’s books written on this subject, so I’m not going to attempt to tackle the subject. One thing to bear in mind: don’t assume that the first transaction with the customer should be profitable. If you average customer buys 5 times a year at average $100 each, and an average margin of 20%, then your customer is worth $100/year. You should be more than comfortable spending at least $20, if not a lot more, to buy each customer.

The other big question is how well are you converting? For my client, let’s say we work out we can afford to pay $150 per customer. At $5/click, that means we need to be converting at 3.3% to be profitable. So the other big thing to focus on is conversions – how can you increase the number of customers actually buying? Fortunately there’s many ways to do this.

The higher your conversions, the more you can pay on advertising, the more customers you can get, and the faster your business can grow.