How Google Ads Really Works

*The following is taken from a report written by three of the James partners. It is intended to outline the numerous steps involved in making a Google Ads campaign successful, and the “typical” time frame associated with that process.

It is quite thorough (quite long) but an invaluable resource for anyone that wants “the truth” about how Google Ads really works. Enjoy the read.

Preamble

This report outlines the stages a Google Ads campaign must go through to reach a positive ROAS (return on ad spend), as well as the typical timing of this progression.

This account is based on thousands of campaigns built and optimized by the “James the AdWords Expert” team, and was written by partners Derek Gatehouse, James Abbott and Thomas Gatehouse.

It is important to note that not every campaign will reach positive ROAS. Some products and services are simply not right for a Google search network campaign, and there is great value in understanding the metrics that must be present, if positive ROAS is to be reached. This report will start with a look at those metrics.

It is also important to acknowledge that due to the tremendous (and growing) number of optimizing tools now offered by Google’s platform, it isn’t possible for this report to cover every single optimizing practice one might engage in through a campaign’s life. Each and every campaign will have its own unique path to positive ROAS; the process involves trying many different tactics and strategies – yet only some will end up helping the campaign, while others will actually harm performance.

This is the reality of what Google’s famous algorithm has evolved into. It is AI (artificial intelligence) and it makes incorrect assumptions and decisions very regularly. As such, deciding what each “next step” is in the optimizing process is based on the result of the previous tested step(s), which makes each campaign’s evolution unique. It is for this reason that this report will cover the principal steps, stages and strategies – not the minutiae.

Finally, the report covers the optimizing process that begins as soon as the campaign is launched. We will not cover the process of building the campaign in this report.

*You may refer to the list of defined terms as needed, at the top-right.

Success Metrics

A positive ROAS is just simple math. If the revenue generated by the ad spend exceeds the cost of that ad spend by an acceptable margin, you have positive ROAS.

(Truth be told you should replace the word “revenue” with profit or even gross profit – so keep that in mind – but the above is a more commonly used definition. You get the point).

That means knowing your key metrics and measuring everything properly. Here are the usual key metrics and some examples of why campaigns can fail.

According to the definition above, all we need to measure are two things: the revenue generated by the ad spend, and the cost of that ad spend. So the first sign of a potentially “bad” campaign would be a poor CLV (Customer Lifetime Value). Example to follow.

The second “bad” omen is very expensive traffic. Google Search Ad clicks cost anywhere from a few cents to well over $100, depending on how competitive they are. The more advertisers there are who are bidding on the same keyword, the more expensive that click is going to be. So if you’re in a particularly popular or competitive niche, the more expensive the clicks.

That however is not necessarily going to ruin everything, so let’s give some examples to illustrate. Although the lawyer niche is known to be among the most expensive clicks on Google – with many keywords costing hundreds of dollars per click – the campaigns can still be profitable because the CLV is so high. If a law firm makes an average of $10,000 per client, and it takes 8 clicks at $65 per click to get an inquiry, and it takes 3 such inquiries to get an actual client, then the cost to buy that client was $1,560. Law firms are happy to pay that amount if the average client value is $10,000.

Another good example – this time of bad metrics – is the carpet cleaning business. Clicks are in the vicinity of $10 each. Visitors that click these ads are typically going to click, and then visit, several of the ads’ websites in order to shop and compare, which means the closing ratio is lower. Stated another way – it takes more clicks before winning a paying client. Again, that will be fine as long as the CLV is high enough, but unfortunately most carpet-cleaning jobs do not generate much more than $125 to $300 and, with $10 clicks bringing in a lot of tire-kickers – making this type of campaign profitable is difficult.

So the “spread” between the CLV and the click cost is the first and, arguably, the biggest factor. But there are many soft factors as well.

Once the click has taken place, the Google Ad campaign’s job is done. So the next factors have to do with the landing page and the website, which includes the UX (User Experience), the CTA (Call to Action) and the offer or product or “hook” itself. You see, even if you can get 50¢ clicks, it doesn’t matter if your visitors never convert.

The offer and its CTA, coupled with the user experience (how easy it is to flow through the desired actions on your website) play a major role in the success of Internet marketing campaigns. This is as important as the Google Ads campaign structure itself.

To summarize, the closer you score to these metrics, the better chance of a successful campaign:

The higher your CLV, the better
The lower your traffic costs, the better
The more compelling the offer on the landing page, the better

It should certainly be noted that much can be done to massage the above metrics. If your Ads manager knows what they are doing, there are many ways to lower click costs. And landing page offers and CTAs can go from boring to enticing, when good design people and good marketers get together. However some niches, some offers, simply cannot be made profitable with a Google Search campaign.

Luckily, most niches have a good shot. Let’s move on to the stages, and the timing of a successful Search campaign.

Stage One

Goal: Max the budget and stabilize the campaign. (aka “Finding your legs”)

When a new campaign launches, Google is very wary about giving it impression share. Impression share, formally known as Search Impression Share or “SIS”, refers to the percentage of impressions (your ads being shown) that you receive, compared to how many impressions were available for searches that you qualified to show for.

Every Google Ads advertiser wants their ads to show. We don’t mean they want them to show high on the page (that’s a given) – we just mean you want your ads to run, instead of not run. But what happens when Google has more advertisers than they have ad space for? What does Google do when 1,000 advertisers are participating in a search that has 20 ad spots available?

This has been Google’s reality for quite some time now and they’ve got it figured out. Those of you thinking that the highest bid wins – well, bids are only a small part of it. There are many other factors that determine not only where your ad will show, but whether it will even show at all.

But we’re making a different point here. If there are only 20 spots, but 1,000 advertisers with cash in their outstretched hands, Google’s challenge is not only who to give those spots to – their business challenge is how to not alienate all those other advertisers. Google wants that outstretched cash! If not for this search, then for the next one.

Enter the brilliant idea of impression share. Because Google owns the search engine market, there is always another search right around the corner. If your ad didn’t show for the search you just performed a few minutes ago, don’t worry – it will show for the next one. Or the next. Or the next. And have a look at the competing ads along side yours – many are different than the ones in the search you did two seconds ago. Lo and behold… Google squeezed all those advertisers in!

Google does the math on everyone’s daily budget, their bids and their CTR (click-through-rate) and calculates how many searches you will need to participate in any given day – aka how many impressions you will need – in order to exhaust that daily budget, but no more than that. (Incidentally, this is why your ad does not show every single time you search for it. You are not participating in every search, only the number needed to spend your budget.)

With that concept explained, let’s get back to the goals of Stage One. We stated that Google is wary about blindly giving a new advertiser impression share. This is because the campaign is new, and Google doesn’t yet know what impression share the new campaign “deserves”. You see, many of the new advertisers that give Google a try each and every day do a pretty terrible job with their ads, or their websites, or their offer, or all of the above. And Google still very much cares that the results for any given search really do produce the most relevant matches possible. So, until they get to know your campaign (mainly via the CTR), they will only spoon feed you impressions. If you have good CTR in the first few days/weeks, meaning your ads seem to resonate with searchers, then they’ll give you more and more.

So, in a campaign’s early stages, even if your budget is set to $1,000/day, it is very unlikely that you’ll exhaust that budget early on. And with the ultimate goal being to gather as much relevant click data as quickly as possible, job one is to get that budget to max out every day ASAP. With a smaller budget this usually happens within a few days. But with a larger spend, and in a more competitive niche, it can take several weeks or more.

The second goal of Stage One is to stabilize the campaign, which means mainly two things:

1) purging the campaign of initial irrelevant or damaging content. Content like:

Keywords that are getting zero impressions after a time
Keywords that seemed like a good idea during the build, but that have alternate meanings you couldn’t predict, and are bringing irrelevant traffic (*much of this can be corrected with match types and negative keywords, but it still needs to be dealt with)
Keywords with terrible CTR
Any surprise ad or keyword violations or notifications from Google

These are just a few of the anomalies that reveal themselves early on and need to be dealt with. There are many others.

2) editing individual keyword bids (gradually) so that all associated ads show in the top ad spots.

*When a new campaign launches, the ads will show all over the place at first. In order to assess each keywords’ performance in upcoming stages, they must all have had a “fair chance” at success, which means showing up top. That requires individual bidding, as each keyword’s CPC will be quite unique.

To summarize, Stage One really just gets the campaign to a point where the click data being gathered going forward, is 100% useful.

*This stage can take as little as a couple of days, or as much as a month, depending on budget and geography.

Stage Two

Goal: Positive ROAS. (aka “Weeding the Garden”)

With budget now being reached, initial clutter removed, and all ads showing high in the search results, we can start using the click data for its intended purpose: to reveal what’s working and what’s not.

It sounds simplistic but the observations during this stage, and the roadmap of edits that will evolve from them, generally spell the difference between success and failure. They include, but are by no means limited to the following:

Analyze the Search Terms section every few days for, a) irrelevant terms (add those to the negative keyword list) and, b) new untapped keyword opportunities to add to the campaign
Watch for keywords that start to reach a certain number of clicks without ever converting, in order to pause them
Watch for keywords that do convert, but at a too-high cost-per-conversion (as discussed with the client), in order to pause them
Watch for keywords that convert within the acceptable cost-per-conversion range, and look for similar long tail keywords to try
When keywords are identified that convert profitably, get as much impression share for them as possible
Experiment with the various bid strategies Google offers, as a Google Experiment (a split test) to test for better impression share, better CPC or ad positions, and many other metrics
Split test ad variations, identify winners after enough impressions, rinse and repeat. This process continually raises CTR, which leads to cheaper CPC
Build out high-performing keywords into their own Ad Groups, with additional variations of those keywords, and matching ad copy
Continue to grow the negative keyword list
Continue to bid shift every few days for ad position in the #2 spot
Optimize bidding for different devices, different days of the week, and different times of the day
Test new landing pages and lead-magnet strategies against the current champion(s)
Stay current with competitors’ performance (through the Auction Insights Report, and Spy Tools)

It must be noted that many (most) of these decisions – which keywords to keep/delete, ads to keep/delete, etc. – can only be made after a certain minimum amount of data has accumulated.

As an example, if after 20 clicks a particular keyword has not yet converted – we would not remove it yet. 20 clicks is not enough to be statistically certain that tossing it is the right move. We usually need between 75 and (ideally) 100 clicks, for each keyword, before deciding its fate. And because each keyword in the campaign has a very different level of traffic, each will reach 100 clicks in its own good time.

The same goes for deciding on ads and other elements – and this is where the time estimate for Stage Two gets difficult to predict. The time to positive ROAS is affected by many things, two of which illustrate the point nicely: budget and geography.

Because decisions regarding which keywords (and ads) to keep or pause requires a certain minimum number of clicks, the faster those clicks accumulate, the sooner the campaign will be optimized. That means a larger daily budget will speed the whole process up. However, if the campaign is very local, there is only so much traffic that can be bought. And so, often a huge budget doesn’t actually speed things up at all.

And finally, understand that there is no finite beginning and end to this stage. We do not wait for a certain time period to pass and then boom – the campaign will either be positive or negative ROAS. As those many bullet points above get implemented day by day, the campaign’s performance evolves gradually and steadily. As such…

Some campaigns reach positive ROAS in their very first month. Some take several months, but with steady, visible (reportable) progress each month. And some, as we have stated, despite best efforts, will never reach positive ROAS.

Stage Three

Goal: Increase ROAS and traffic volume. (aka “Scaling”)

Once positive ROAS has been reached, fine tuning continues. It can never stop. Google is too evolved now (not to mention new features that come along and completely change everything).

Furthermore, new advertisers (competitors) try Google Ads, in every industry, every day, which skews the ad position you were enjoying, the bids, etc. Split testing also continues (Google Experiments). Just because things are positive, doesn’t mean they’ll stay that way or can’t be improved. Optimization and refinements never stop.

With the return on ad spend now in the black, most clients want to crank things up. If you’re now trading $1 for $3, you may as well spend as much as you can afford, and/or as much as your business model can tolerate. New campaigns can be added, additional Google networks, etc.

Restrictions to this growth idea include geographic restrictions and, as mentioned earlier, traffic limitations that may exist. But that said, Stage Three is about looking for more.

James the Adwords Expert... Campaigns that work!

James the Adwords Expert... Campaigns that work!

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