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How to make sure that you don't overpay for leads in Google Ads?

Does an Eskimo that has three reindeer is poor or rich? You don’t know, because you don’t have a comparison.

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A few years ago there was an ad that aired in Polish TV. I don’t remember what it was about and it’s pretty difficult to find the ad on YouTube now, but I remember the headline:

Does an Eskimo that has three reindeer is poor or rich? You don’t know, because you don’t have a comparison.” 

And that’s an example of a line so great that you remember it even after several years. It’s because it’s accurate. There are very little chances of you knowing whether this Eskimo is wealthy or not. Maybe if you knew the Eskimo community, you could answer the question, but most of us can’t. I know I can’t.

I mention this, because recently I was a part of a brainstorming session with fine people from a startup that started acquiring its customers with multiple sources. They realized that Facebook Ads leads cost them about €20 each and Google Ads leads, on the other hand, range from similar amount to €500

And it’s easy to understand that the team wanted to know whether their Facebook leads are cheaper than market average and they pay the market price with Google Ads, or whether Facebook is doing well and they overpay on Google Ads. 

The classic three reindeer paradox right there, isn’t it?

It would be great if you could knock on your competitors’ doors and ask them what they pay, but we can’t. And if you ask me, that kind of knowledge would be irrelevant. Just like other metrics agencies often brag about: “look at this CTR, it’s amazing! Did you also notice how we decreased CPC in this campaign?”. That’s cool, but the client doesn’t really care about all this. Why people come to us is because they want to scale up their businesses and have more money in their bank account. 

So what’s the difference between having 100 leads €20 each or 10 leads €200 each if they both get us the same amount of paying customers? From business point of view - there’s no difference. And business point of view is the only thing that matters in performance marketing, if you ask me. 

But it starts to get interesting if we want to improve our ROAS or ROI and we need to know whether there is a way to reduce the cost of lead acquisition without harming the lead quality. So how on earth can we learn what competitors are paying for a lead? Well, if you’re not interested in corporate espionage - you can’t. But you can estimate. 

You know your conversion rate, you know your CTR and your CPC. You can get the data about your market average (just research it online) and go on Ahrefs to find out what keywords your competitors are using in their search campaigns. 

Do the math. If you need 20 clicks to get a lead and the market average conversion rate is 5% too, you can safely assume that they have similar conversion rates. It’s easy to get rough estimates on expected CPC with Google Keyword Planner. 

Let’s see our campaigns. If we want to run a paid search campaign in Google Ads covering keywords like “digital marketing agency for startups” in Germany, Switzerland and Austria each click would cost us 16.42 EUR for the upper page. We can obviously bid in a more conservative manner and start with 3.82 EUR for lower placements to find out whether this keyword would bring us valuable leads - but let’s assume it does. 

Of course we have to remember that these Keyword Planner estimates aren’t always 100% accurate. It could be higher, it could be lower - it all depends on how well the campaign is optimized and what’s our Quality Score is. 

WordStream tells us that in Business & Industrial niche, the average conversion rate for paid search is around 3.71%. We can all agree that this number is something that seems realistic. In this case, we need 27 clicks before we can generate a lead. 

If we were to pay what Google suggests us to pay for the upper page, each lead would cost us 443.34 EUR. That’s pretty expensive, especially that we don’t have 100% success rate in converting leads to clients. It would require around 3 to 5 leads to acquire a paying customer. 

This makes our client acquisition cost on this keyword around 1330.02 - 2216.7 EUR. Is this cost ok? Well, I could live with that if I had to, because our clients stay with us for years so return on investment would still be acceptable.

But if we managed to limit our CPC to 10 EUR (by increasing the QS or just being fine with lower positions in SERPs), each lead would cost us 270 EUR. This way I know that acquisition of a paying client would range from 810 to 1350 EUR. 40% less - that’s something I’d like more. 

Alright, so if these are the official numbers I know that if I pay more than that, there’s potentially a room for further improvement, if I pay less, I’m doing a good job. 

And I’d be fine with both scenarios, but many businesses would not. Because they have lower margins, they acquire customers for one-time transactions and so on. The point is, you can estimate whether covering specific keywords is the right thing to do or if focus on paid search campaigns is good for your business or not. 

Because even if these numbers above aren’t 100% accurate, they give us rough estimates on what we should expect. If I don’t like them, I can try to spend this budget on other sources or perform an experiment to make sure that this is in fact what we’re paying for a lead or a client. 

After all, we still don’t know if owning 3 reindeer makes an Eskimo wealthy, but at least we’re aware of how to estimate whether we’re overpaying for a lead in Google Ads.



Slawek

Slawek

Founder of Digiffic.com. I've been working with PPC campaigns since before it was cool. Not that it wasn't cool back in the day. It's just way more cooler these days.

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