No Profit in Pay Per Click

There are now many companies offering to setup and manage pay-per-click (PPC) campaigns for other businesses. Some of these providers are even funded by venture capital and headed by lots of smart people. In fact, I used to work for one of these such firms and watched them burn more than $5,000,000 trying to create a PPC campaign management business. That money bought them about 2,200 customers, of which less than 200 were retained. Two questions abound from this:
1. Why were they not able to keep more than just 10% of the customers?
2. Is this company unique, or are other, similar companies in just as poor shape?

A Little Background:

These companies are all trying to setup and manage PPC campaigns such as Google's Adwords and Yahoo!'s Search Marketing on behalf of small, local businesses. The idea is that they can be experts in search engine marketing (SEM) and gain some economies of scale to be able to deliver better value to the client than the client get for him/herself.

The Problem:

On the surface it seems like the perfect marriage of two buzz words, "local search" and "pay per click". The problem is in the value proposition to the business owner. With two hours of time from the business owner's teenager, most small businesses would have no problem setting up an Adwords campaign. Of course it will not perform as well as a professionally designed campaign, but you have to look at the incremental value, which is probably around 50% or less. When you start adding in a 25%-50% markup on the click costs, outsourcing this becomes cost prohibitive very quickly, especially when you are talking about hundreds, or even thousands of clicks per month when only 1%-2% of them convert into sales.

The model that many of the companies are using is basically the same. They select some keywords, create a 1 page landing site, and then drive paid traffic to it. Some record the calls, many provide detailed reports to prove how well the program is or is not working and then bill the customer for as many clicks as they can generate. This produces widely varying invoices at the end of each month, and can end up costing the small business hundreds of dollars per converted customer.

It is also very important to realize that the goals of the PPC provider are not necessarily the goals of the advertiser. The advertiser is looking for more customers, but the PPC provider doesn't typically get paid on the volume of customers sent, but rather on the volume of visitors sent. The metrics typically used to measure success of a PPC campaign are things like Click-Through-Rate (CTR) which measures the ratio of impressions (number of times the ad is shown) to clicks (number of times the ad was clicked). That has very little to do with the rate at which those clicks turn into customers, and that's where the value proposition degrades because the business owner doesn't need visitors, s/he needs customers.

Even though clicks can be a path to new customers, by themselves they are useless to a small business and are expensive to buy. If you don't believe me, ask your friendly neighborhood plumber how much value he places on a click, or a visit to his site, and he'll surely say zero. But a competitive word like "plumber" will cost you more than $1/click in most cases. Multiply that by even a modest 200 clicks per month, and the guy just paid $200 and probably only got a 1% conversion rate!


Solutions?:

What's the answer then? Does PPC not work at all? My personal experience of working for one of these PPC campaign management companies (the one that blew $5 million) taught me a few things. For ease of reference, let's call them "Leads Team". Leads Team showed that across all their customers, the small business could expect to spend a total of about $65 per call generated. Of those calls, probably only about 1 in 5 (on a good day) were motivated buyers. Of those motivated buyers, let's just say the business closed 2. That means that of the $325 spent to ring the phone, only 2 sales were generated. In order for that program to make any sense at all, each job obtained has to make at least $165 in profit...which can be a tall order. You might be thinking that Leads Team was simply incompetant, which may be true, but you should also know that they outsourced the campaign management to another, more experienced firm that handles many other company's campaigns.

So if PPC doesn't work, then why are VC's dumping millions into companies doing it? Think back about 10 years and you'll remember this is not the first time VC's pumped money into hopeless ventures. PPC DOES work! It's this particular model that is hopelessly flawed. Putting all your eggs in the PPC basket is ill-advised but it does have a place in a well laid out Internet marketing plan and there are companies out there with better, more effective approaches.

The way Prospect Genius structures its offering is quite different, and in my opinion will work much better for both the vendor and the client. By using a more substantial microsite, rather than a landing page, they can leverage the power of SEO and supplement it with PPC. That allows the business to pay only for a few, highly valuable keywords, and do the rest of the heavy lifting with the SEO.

Service Magic on the other hand, takes another approach that also seems to work. They do not charge for clicks at all, but instead charge only for the call. They SEO their own directory heavily, which allows their customers to be found in search engines. Once a customer places an inquiry, they then deliver that lead via email to at least 3 advertisers in their directory, who then compete with each other to woo the customer.

Conclusion:

If you are looking to start a business offering PPC services to other businesses, you'd better have an extremely unique way of doing it. Right now the only people making money at it is Google and Yahoo! and that's because the VC money, and all the dollars spent on PPC goes directly to those two companies. Until they start offering reseller pricing to companies like Leads Team, there will not be sufficient margin to provide value to the customer and earn a profit at the same time.