Yes, this is the reality of the online marketing; been there, done that!
Even now, it is so common to find big holes in the calculations people do in their business models – grossly underestimating the cost of marketing, especially online adwords marketing.
Just a few weeks ago, I saw a presentation where the company was selling a widget for $99 and they had allocated $12/unit as adwords cost. In the first month, their actual cost was $44/unit and in the second month it was $34/unit (and I am not convinced that the reduction in the second month was because of better targeting or better conversion primarily attributable to adwords program).
Another misconception that I have seen way too often, is the belief that somehow the cost of adwords marketing is related to the cost of what you are selling.
The argument goes like this “I see people are selling widgets for $10 on adwords; I know it costs $5 to make it, so they couldn’t possibly be spending more than $5.00 to acquire a customer!”
Unfortunately, this is not correct. In many cases, the vendor who is selling $10 widget might be spending $12 to $15 for adwords and hoping that a person buying $10 widget will buy something else from them or will become a returning customer and the over all cost of the adword expense will be low.
So unless you have a matching offering and have ways to convince a customer to buy additional things or have the customer return for something else, you can’t win the adwords game.
The only way to correctly gauge the adwords cost is to gather conversion data and look at real time bids for the keywords and base your calculation on 2nd and 3rd highest bids placed. Why 2nd or 3rd bids and not the top one? Because invariably I have found people over spending just so that they can stay on top. Typically this happens when there is a disconnect between the part of the organization selling the product and the part of the organization marking the product.
Adwords and other online marketing can be excellent and very cost effective tools, you just need to understand what is the true “cost” and how you measure “effectiveness”.
Source of the picture.