The declining profitability of Google Adwords

Google Adwords used to be a great way to get targeted traffic cheaply (if you knew what you were doing). I think those days are well and truly over.

I have been using Google Adwords to advertise my table plan software since 2005. The following graphs show some metrics from my Adwords campaigns over that 8 years. The graphs show 12-monthly cumulative figures (e.g. each point represents the value for that month plus the preceding 11 months). Using cumulative data hides some of the noise, including the seasonal variations that are inevitable in a business related to weddings (more people buy my software when it is summer in the northern hemisphere), and makes the overall trends clearer.

Average cost per click (CPC)

Average cost per click (CPC)

Clickthroughs

Clickthroughs

Conversions (sales)

Conversions (sales)

Profit per month

Profit per month

The trends are clear and it’s not a pretty picture. Less, more expensive clicks = less profit. I can either pay more and more per click to maintain the same number of sales. Or I can continue to pay the same per click and get less and less clicks. Either way, my profit goes down. It isn’t a trend I see changing direction any time soon.

I think these long-term trends are mostly due to increasing competition. As more and more companies bid on Adwords for a finite number of clicks, it inevitably drives up the cost of clicks (simple supply and demand). It also doesn’t help that a lot of Adwords users are not actively managing their campaigns or measuring their ROI, and are consequently bidding at unprofitably high levels. Google also does its best to drive up CPC values in various ways (suggesting ridiculously high default bids, goading you to bid more to get on page 1, not showing your ad at all if you bid too low – even if no other ads appear etc).

Of course, this is just my data for one product in one small market. But the law of shitty clickthrus predicts that all advertising mediums become less and less profitable over time. So I would be surprised if it isn’t a general trend. Are your Adwords campaigns becoming less profitable? Have you found another advertising medium that works better?

44 thoughts on “The declining profitability of Google Adwords

  1. Chart Gantt

    I believe that the adwords model is even more sinister than you mention. Have you looked at the search results lately? Very very few search results on page 1 contain commercial organisations. They tend to be government or not for profit entries which do not have a volume of backlinks.

    These changes started in Early January this year, and the great migration is underway. Google is de-prioritising commercial sites from natural search with a clear strategy that these companies will pay for advertising via Adwords.

    Soon commercial organisations only way of getting found in google will be via adwords.

    There completes the plan for world domination!!!

  2. David Hyde

    “not showing your ad at all if you bid too low – even if no other ads appear etc).”
    This is the one that makes me nuts. Or did, before I paused everything at the end of April. My Adwords spending kept going up and reached ~25% of my total income, which just seemed insane to me. It’s too soon to tell whether shutting it off will be a good move or not. We’ll see.

    1. Sanjay

      Exactly. Even if there is zero competition on some keyword, the minimum bid to show your ad is too high. The explanation by adwords is obscure, saying”based on the history of the account and the keyword.” This hocus, pocus is not transparent and not possible to verify. The system has become greedy.

      1. David Hyde

        I have no problem with greedy. The policy just doesn’t make sense unless they truly believe they can coerce us to spend more for ads for which there is NO competition, AND that Google believes no income is better than *some* income when they perceive the prospect of coercing us into higher bids is good.

        I can only speak for myself, but paying $1+ for an ad for which there is *no* competition – that ain’t gonna happen.

        To me that’s my big problem #1. Andy also hit on my big problem #2 (which I think is harder to handle/correct): There seem to be a lot of businesses spending much more than is reasonable on Adwords – at least what seems reasonable to me. No matter how much your stuff sells for, I find it hard to believe that any company sees a positive ROI on $5+ clicks. But that bid is what I frequently saw with the competition. Am I a bad person for hoping those dingbats go bankrupt due to their adverstising expenses? (I say no :-))

          1. Fred Hunter

            Plus, they offer “coupons” (free advertizing) for all companies.

            That amounts to the same as the FED printing money:

            Devaluation of the currency, in other words: the price goes UP.

            Basically, it’s saying: “screw you, adwords user”.

        1. apxalarmco

          maybe you just haven’t bumped up the lifetime value of your customer sufficiently. ;)

  3. y0z2a

    Would be good to see quality score over the same period if you have it, as it could be that your site is less relevant to the audience that you are trying to reach over the same period?

    1. Andy Brice Post author

      I’m not sure you can meaningfully measure quality score across a whole account. There is no overall decline in my CTR.

      1. y0z2a

        I would focus on the top traffic generating KW (volume of clicks) & if you have the QS data, would be interested to see if there is any change which was driving up your CPC over time.

  4. Lelala

    OK, the most simple idea is just raising the prices – sure, this wouldn’t work in a market with limited priceelasticity… Maybe you can try to do some A/B test or MVT to find out if your users may be willing to pay a little more, like a price rise of 1 USD or 1.5 USD?

  5. Srinivas

    In any system the amount of arbitrage available gets squeezed over time, more mature lesser the arbitrage. Adwords works best for High LTV sales and not for one time sales, that is why subscription based business models love Adwords. Feel free to ping me on @Srini_Baba I can help you refine your campaigns.

  6. Brandon

    Adwords is a lot more competitive today than it was a few years ago. So its obvious that the cpc will only get higher over a period of time. Having said that, conversion is more a factor of product value, copy, and UX rather than adwords as a platform. A little more focus on creating an enticing funnel may do wonders to your conversions.

  7. MBDude

    Have you tried Bing Ads? I understand their CPC is generally lower than Adwords, but I haven’t tried them myself yet.

    1. Andy Brice Post author

      I have been a long time user of Bing (and Overture before that). In my exerience the ROI is significantly lower and (given the lower volume of traffic) the profitability is *much* lower.

  8. Liviu

    I agree completely. We noticed the same problem; After doing the math, it just doesn’t make sense. We are selling subscriptions of $4 up to $15 per month, yet Adwords CPC is $0.50-$1+
    Conversion rate should be incredibly high in our case to make it worth the CPC price.
    Any suggestions for an alternative service?

  9. engineer

    ” not showing your ad at all if you bid too low – even if no other ads appear etc”

    This part, as far as I’m concerned, amounts to a scam. Not letting you buy remainder or cheap inventory is google cutting off the low end of the market to make people pay more…. making it not really an “auction” for clicks at all, as advertised.

    Further, given that google is a generally dishonest company, and all stats about performance (other than your final sales numbers) come from them, there’s no reason to believe they’re even giving accurate data to you.

    The leson: Don’t do business with untrustworthy companies.

  10. Software Candy (@softwarecandy)

    This excellent article confirms own experience. Stopped using Adwords very long ago and now counting on word of mouth only. More stable that way, lower expenses, higher profit margin. The link to “the law of shitty clickthrus” is priceless.

  11. mark

    Helping you get to a higher position isn’t “goading” you – it leads to higher ctr and quality scores, which helps. Speaking of which, you make no mention of QS, or how you’re optimizing your landing pages. Are you actively managing keyword-match types, removing unprofitable terms and trying new ones?

    Yes, costs will rise as competition increases. But so should your business. maybe youre just no longer the best provider. I’ve gone from $10/conversion to $4.75 and still optimizing, its not set and forget. If you can’t invest the time yourself then pay someone else to manage it.

    1. Andy Brice Post author

      >Are you actively managing keyword-match types, removing unprofitable terms and trying new ones?

      Yes, yes and yes.

      The campaign is actively managed and I have 8 years of data to work off.

      >maybe youre just no longer the best provider

      If my product was becoming less competitive, you would expect a declining conversion rate. That is not the case.

      1. mark

        Have you tracked QS? This will over-inflate CPC at times and their guidelines do change over time.

        I have also seen costs rise over the years, but not to the point of having me question the ROI.

        Re: ads not showing – if you’re logged in they may opt you out of ads that you and your competitors run. Try checking it from a new IP on a non-logged in computer with no search history.

  12. Jim

    Just because Google sets a minimum doesn’t mean your ad won’t show if you bid less. But your quality score must be high. The average suggested bid on my keywords is well over $1 (closer to $1.50-$2). I bid .10 on all keywords regardless of what google suggests.

    Yesterday was an average day – about 120 clicks, cost of $10.12 and 9 conversions. Slightly better than that but I lowered just in case Google is reading. :)

    I’ve been consistently lowering my bid to see what Google would do. Started at .50 and now down to .10

  13. Jon Matthews

    Do you have any evidence (anecdotal or numerical) that this issue spreads further than PTP? For example does it seem to be extending to a lot of desktop software? A lot of software? Across industries?

    The latter would be interesting, if Google are gaming the quality score to force people to spend the maximum they can even when there’s no genuine competition (& many think that’s what QS is really for), then they risk ruining the inter-industry reputation they have now (i.e. Adwords is a no brainer). That may dry up their supply of fools who use Adwords unprofitably.

    If that happens Google will have lost their golden egg. It’s a risky game for them.

    1. Jim

      No evidence besides my own account. We do have concern that Google cuts us off at some point and stops showing ads until I bid higher. I do have a very high click through rate so maybe Google figures they are making a ton from me compared to other customers (here are a few from today: 35 imp & 3 clicks, 25 impr & 3 clicks, 13 impr & 2 clicks, 1 impr & 3 clicks, 1 impr & 1 click).

  14. Martin Romañuk

    I think your niche is perfect for a SaaS version, specially for the PRO event planners, they will be happy to pay 49USD each month (probably), instead of 49.99 or 199.99 once. You can provide them with additional services like showing photos of past events for promotions, a web iPad version, etc

      1. Steve Hanov

        Andy, I have been following your writings for many years. This post, and your response to this comment, scares me.

        I hope that you are thinking seriously about new platforms. Laptop sales are declining. People split their planning time between home and work. They switch between tablets and laptops without thinking, and are starting to value the instant portability that most mobile apps and cloud service have. The idea of installing software and moving files between them seems antiquated to a lot of people. But these are people that you are never going to hear from, because they are not your customers.

        These are my feelings. I do not mean to sound provocative. Of course there will always be a market for for downloadable desktop software, but my experience with being hounded by hoards of spyware bundling companies makes me feel that the vultures have moved in already.

  15. Alin Stanciu

    Been through same dilemma, as ROI decreases constantly in the last 1 year. This is especially the case of GDN, but also search ads. I stopped 5 out of 8 campaigns (the other 3 were responsible for 92% of the profit) and I reduced Adwds budged by 65%. Less visits, more profit for my company and around 15k less in Google’s pocket monthly.

    Everything is caused by the increased competition on bidding and, imho, the paradigma is changing since big advertising spenders (the usual TV clients) are turning their budgets on Adwords. They are not ecommerce businesses, their are not looking for a direct profit (as we do), they have just found a better way to spend their marketing budgets when looking for communicating to their clients. I’m pesimistic that adwords will be the same in the future, the only performant area will remain the remarketing of own visitors/clients.

  16. anthonydavidadams

    What else are you selling them? You have a database of 7 years worth of happy 1 time customers at $30 — many of them businesses. Evolve and upsell them some other products and services. Maybe you could look for some join venture options as well.

  17. Mike Sutton

    I’m moving away from selling software and towards contents sites these days. My experience is that Google loves a site with lots of original content and if I where still selling software I’d be working very hard to add articles, howtos, FAQs, blogs etc to my sites.

    Of course, having a content site with AdSense ads on it I’m on the opposite side of the coin, and in the last twelve months I’ve seen a massive increase in effective CPMs. I have no idea if this is a change in Google’s rates generally or specific to my site.

  18. WaltFrench

    “Peak Ad” already?

    Econ 101 says Google should raise prices right up to this point, where all its slots are filled by vendors who aren’t sure if the cost is worth it or not. That is, once they’ve developed the business to the point that other ad services are more trouble than they’re worth, which other commenters seem to say has ALSO happened.

    In the next phase, Google can aim for expanding its getting even MOAR ads in front of users’ eyes. But that, too, is self-limiting. No matter how many ads we see for your fine services, there are only so many situations that need ‘em; only so many bottles of beer that Americans will down, no matter how constantly we’re reminded how cooling, lite and flavorful they are.

    I don’t see how this trend changes direction; if anything, it could worsen as others start seeing what you have and cut prices and or costs in an effort to keep things going, ending up in a race to the bottom, polluting the ecosystem.

    Big problem. But if your experience is widely felt, it becomes a bigger problem for Google.

  19. FlyonZWall

    I am paying google more and making far less than any year. If I paid $1,000 a month I used to make $10,000 a month. For years. And I was PR 1 and PR 2. Now I pay $2,300 a month and I am almost making nothing, and PR 3… Google eats before I do these days – IF I eat at all.

    I came on here to determine if I should can GoogleAds. I feel they are pushing my natural results DOWN to replace with GOOGLE SHOPPING and I was a PR 1 site. They control so much it is scary. So, I see other junk they throw out there, as more pushy “if you don’t sell on Google Shops” you better have “Google Ads” because page rank was never guaranteed when you were born.

    In my case they claim I am getting TWICE as many hits this year for HALF the price I used to pay. And that all looks GREAT! But I am making less than half of what I used to make, so scratching my head at the shell game. My settings have not changed much to explain it on my end.

    Then, the few days I simply stopped running ads at all – they e-mail “DO YOU NEED HELP??? We noticed your not running ads!”

    I know enough about business to know nothing good lasts forever, and YES! To the guy who pointed out Google is giving our competitors FREE money. Anyone can go on eBay and keep buying those cards too. So, it does seem like unfair trade practices. But no ones going to sue the guy “too big to sue” for it.

  20. Kate

    Product Listing Ads is the way to go. I get $0.35 avg. CPC. I agree text ads are hard to convert on. I use a software Sales and Orders Ads, great to see your P&L per product. Product Listing Ads are only good for ecommerce sites.

  21. The Hitting Project

    I work in the travel industry — 5 years ago I could get 1st position (location keywords) for $1 per click. Now you would be lucky to sniff the first page for less that $5 per click. The big companies like Agoda don’t car how much they spend they have a limitless budget.

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