AdWords may also be a good choice when you have just a few dollars for reaching your audience. You can advertise on Google for as little as $1.50 a month¹. Google charges just $5 to sign up for AdWords, and after that, you can set a budget as low as five cents per day. It costs more to send five snail-mail letters a month.

The confusing part about AdWords is that Google doesn’t charge a set price for ads. Instead, the company lets you bid on the keywords that you want to trigger your ads. If you bid higher than everyone else who’s bid on the same keyword, your ad is likely to appear near the top of the sponsored links.

For example, if you set a maximum bid of 35 cents for the word stapler, and the next highest bid is 23 cents, Google gives your ad priority among the sponsored links it serves up when somebody searches for stapler. Even better, Google charges you only a penny more than the second-highest bidder, so you may never even have to pay the full 35 cents you bid. If you bid less than the highest bid, Google still lets you play, it just doesn’t show your ad as often as other people’s.

Note: When deciding who gets top billing among the sponsored links, Google factors in bids and how many people click through each ad, giving preference to the more effective ads. You can’t, therefore, buy the top spot outright. But you might be able to sneak up on a competitor with deeper pockets.

If that all sounds appealing, it should: Google has designed a seductively smart system, and joining takes just a few minutes. But make no mistake: AdWords is a demanding way to advertise on the Web. This chapter explains the challenges, but first you need to get your head around Google’s advertising terminology.

Understanding AdWords Terminology

Google tries hard to make AdWords perfectly understandable, even to the advertising neophyte. Yet for all the PDF guides and multimedia tutorials Google offers (https://adwords.google.com/select/library), the concepts can get rather confusing, rather fast.

It’s useful to remember that the AdWords universe is a hierarchy. It begins with keywords, which are connected to ads, which are connected to Ad Groups, which are connected to campaigns, which are connected to accounts…which are connected to the anklebone.

• Keywords are the magic words that trigger Google to show your ads when people (read: potential customers) search for the terms. If, for instance, you’re selling a new line of floral shirts and you choose Hawaiian shirts as keywords, Google displays your ads when people search for—what else?—Hawaiian shirts.

  Google lets you decide whether you also want to market to people searching for leisurewear or Hawaiian cruises or other inexact matches. For added flexibility, Google offers four types of keywords: broad match, phrase match, exact match, and negative keyword.

  Once you pick your keywords, you associate them with an ad, described next.

• An ad appears on a Google search results page as a sponsored link or on an associated Web site, via AdSense, under the legend "Ads by Google." Figure 1 has an example.

  One or more ads make up an Ad Group.

• An Ad Group is a collection of ads taken out by one advertiser that all target the same keywords. For example, you might have three or four variations on the "Hip Hip Hawaii" ad or separate yet similar ads ("Boffo Bermudas," for example) that you’ve associated with the same Hawaiian shirts keywords. You may think of this as your Clothing Ad Group.

  An ad group is part of a campaign.

• A campaign is a collection of Ad Groups. How you slice a campaign is really up to you. For hiphawaiian.com, it might be spring versus summer, men’s versus women’s, clothing made of cotton versus clothing made of shells.

  And any number of campaigns make up your one account.

• AdWords accounts are unlike any other advertising account you may have come across, because Google has gone out of its way to make this program flexible. Your minimum cost is $1.50 per month. You can run ads for as short or long a time as you like. And you can run as many or as few campaigns, Ad Groups, and ads as you wish, targeting any keywords that are in some way related to your line of products or services. The Fruit of the Month Club is a bigger commitment.

Figure 1: As the top ad shows, a single ad consists of a headline ("Hawaiian Shirts on Sale"), two short lines of description ("All Paradise Found Shirts on Sale," "Great selection. All styles."), and a URL (“www.mauishirts. com”).

Incidentally, Google used to sell the two spots above the regular results (the ads with the colored backgrounds) in a separte program. That program no longer exists. Now if you want to get an ad in one of those spots, it must have an usually high click-through rate.

Tip: AdWords provides a helpful Keyword Suggestion Tool (https://adwords.google.com/select/main?cmd=KeywordSandbox) to guide you beyond the obvious choices for your products and services.

Note: If you’re looking to sell just one small widget, and you plan on having just one ad, you still need to set up an Ad Group and campaign to hold that ad.

Before You Sign Up

Before you even consider shelling out valuable advertising dollars, you should consider two things: is AdWords even necessary for your business, and is it worthwhile? If you decide to go for it, you need to do some market research to figure out the keywords that might work for you.

Is it necessary?

You might just have all the free, targeted advertising you need in regular Google search results. And as good as AdWords are, nothing beats a great ranking when it comes to click-throughs. (For proof, ask your friends if they ever read or click the sponsored links. You’ll be amazed to find that most people ignore them completely.)

Run a few Google searches using keywords or phrases you’d hope (not expect) would trigger your site in results. Make note of those in which you appear above the fold—typically the first five results or so. If you’re consistently showing up near the top, consider putting that ad cash elsewhere (toward other keywords, for example, or other marketing outlets entirely).

If you’re making it into the top ten results, but not the top five, think about whether pumping those advertising dollars into a bigger and better site might net you some more attention and links—perhaps enough to raise you a result or two in the regular rankings. Of course, $5,000 or $10, 000 can buy a lot more in the way of site improvements than AdWords ads.

Is it worthwhile?

The biggest mistake people make before joining AdWords is not figuring out how much clicks are worth to them. That’s like wandering into a car dealership knowing you need a new auto but having no idea how much you can afford. Before you know it, you’re driving out in a nice convertible that costs more per month than your salary.

Fortunately, there are a few fairly simple calculations you can use to figure out how much you can sanely spend on AdWords, or whether the costs are even worthwhile for your business.

The first step is to figure out how much you’re willing to spend for every sale. For example, if you sell fur-covered, roof-mounted ski racks for $3,000 a pop, and your gross margin (the amount you make after factoring in your costs) is $1,500, you might be willing to pay $200 or more to make a sale. If you sell fur-covered mountain bike seats for $250, you may be willing to spend only about $30 for a sale. (Unfortunately, there’s no general rule of thumb for determining your maximum cost-per-sale; it’s a business decision you have to make independent of AdWords.)

Once you’ve determined a maximum cost-per-sale, you need to get your head around a conversion rate, the percentage of people who click your ad and then actually buy a furry item. Conversion rates can vary from campaign to campaign, but industry experts say that a rate of one percent is fairly common. You read that right: Only one out of every hundred people who click through to your site is likely to actually spend money.

With your maximum cost-per-sale and an estimated conversion rate, you’re ready to do some math.

Note: Weirdly, you do this math before you have a clue as to how many people will see your ad or what your click-through rate will be. That stuff comes next.

Here’s the magic equation: simply multiply your max cost-per-sale by the conversion rate. The answer equals the most you should pay for a single click. For example, if you decide that the most you can afford to pay for a sale is $10, and you assume that one percent of people who click your ad will wind up buying your product, then the most you can afford to pay for a click is a dime ($10 x 1% = $0.10). If your conversion rate is a stellar two percent, you can afford 20 cents.

Tip: Industry experts say that the average cost-per-click these days is around 35 cents. The actual cost, of course, can vary widely.

If you’re advertising a bunch of products with a range of prices, or if you want to find out how different conversion rates affect your cost-per-click (or if you hate math), you can create a spreadsheet like the one in Figure 2 to let you determine the most you can afford to bid per keyword for any particular campaign.

Figure 2: A chart like this helps you play around with different costs-per-sale and a range of possible conversion rates. Here, the maximum costs-perclick shown in columns D, E, and F comes from multiplying column B (different possible costs-per-sale) by the percentages in row 8 (different possible conversion rates).

Once you’ve determined your max cost-per-click, you can start figuring out how much AdWords might cost you every day, and how many sales you can expect to get for your daily budget. The charts in Figure 3 guide you through the process.

If you estimate a one-percent click-through rate, a one-percent conversion rate, and 35 cents per keyword, you’ll probably get a ballpark guess on what AdWords might cost—and earn—you. And all of this math may very well lead you to the point of deciding AdWords is simply too expensive or will likely yield too few sales to work for your site. But if you’re still intrigued, you can find out whether Google is actually selling keywords at a price you can afford and how many impressions you can expect from those keywords. Simply sign up for Adwords and play with the Traffic Estimator—a tool for guesstimating just those factors—without spending a dime.

The market research

If you decide to increase your visibility with AdWords, take the time now to do some market research:

• Mix and match your keywords and phrases to learn which searches your competitors are associated with. Bear in mind that you’ll have to pay more for popular keywords, and in many cases, you’ll do better if you differentiate yourself with very specific keywords and effective, targeted ads. For example, if you have a small bookstore in Boise, Idaho, you can associate yourself with your locale and a specialty, like first-edition Jane Austen books. If all you have to say is "We also have books," no ad will help you compete against giants like BarnesandNoble. com or BooksAMillion.com.
• Put yourself in the shoes of your potential customers when you think about what your ad might look like. What are they looking for? What enticing words might draw their attention from the search results and direct their eyeballs (and mice) to your ad? What would differentiate your ad from those above and below it? You certainly don’t want to be just one of many advertisers sporting a "Hawaiian Shirts" title. Should you mention price (is your $39.95 pricing competitive)? Discount? Hard-to-find designs? Other matching merchandise? Keep these things in mind, and be prepared to tweak your ads to come up with the most effective copy.

Top left: This chart shows you how much AdWords will cost you per day if you get 100,000 impressions at a click-through rate of one percent and a cost-per-click of ten cents.

Top right: This chart shows you how many sales you can expect to make based on the clicks you’ll get multiplied by the conversion rate. The cost-persale is the total cost from the chart on the left multiplied by the units sold.

Bottom left and right: The same formulas, but with a different cost-per-click. You can also play with the impressions, the click-through rate, and the conversion rate to find different winning scenarios.

Tip: Your keywords might bring up ads unrelated to your products and services. For example, if you sell video camera parts, your keywords might pull up ads for video-rental services. Even if those advertisers aren’t your competitors, you’ll still be competing with them for people’s attention. Accordingly, plan ads that will help distinguish your offerings from the rest of the crowd. Think, too, about finding less obvious keywords that might have fewer advertisers—and lower costs.

The Web is littered with sites that failed to plan ahead and lost scads of time and money to AdWords. Don’t let it happen to you.

A Few Final Words of Warning

To run an AdWords campaign that makes you more money than it costs (or draws enough readers to justify the costs, if that’s your goal), you must be prepared to spend a good deal of time, maybe hundreds of hours, honing your ads. And you must be incredibly organized and methodical as you try out hundreds or thousands of different combinations of ad copy, keywords, keyword details (Hello Kitty vs. "Hello Kitty"), landing pages (the place on your site where somebody goes when they click your ad), and daily budgets. And that’s just for a small campaign.

Although Google automates a number of processes in AdWords (like lowering high bids for clicks to a penny above your competitors’), you have to manually juggle a lot of variables, each of which has many possibilities. Furthermore, you have to try perhaps dozens of strategies to figure out what combinations of variables lead to clicks and cost-effective ads. Moreover, some of the factors (like a keyword’s cost-per-click) can change over the course of a single day. It’s not for the faint of time or patience.

In addition, while you can spend as little as five cents a day in theory, and you can definitely set your own daily budget, in practice you may find it difficult to spend within your limits and still reach potential customers. Small-scale spending was easier when Google first introduced its cost-per-click system in early 2002. But as more and more advertisers join the program, the keyword bidding gets more competitive, and costs go up incrementally. As a result, today many potential advertisers are nearly priced out of the market.

All that said, AdWords is a great Web-marketing tool for a lot advertisers, and it may be for you, too.

¹Footnote: AdWords is new enough that Google adds new features every few weeks, which makes writing a book about the program like trying to nail Jell-O to a tree. This chapter covers all the features that exist at the time of this writing.

Editor's note: This article was excerpted from Google: The Missing Manual. For everything you need to know to become a Google guru, be sure to check out the latest edition.