Set your search budget to be based on its profitability

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If you win an auction but pay more for an item than you would have paid somewhere else, is that auction a success? How long can a company stay afloat if it pays more to acquire each new customer than it makes in profit? Keep these questions in mind as you set up your keyword bids. Limits must be understood in the context of profitability, compared to what you pay to acquire a customer through other channels.

Recently, CNN.com and other sites paid over $5 per click to gain traffic during a uniquely newsworthy event. Can that pay?

If we assume CNN.com is able to charge a display ad CPM of $10, or 1 cent per ad viewed, each visitor who is attracted through paid search at $5 per click would have to view 500 ads for CNN.com to break even.

That would require each visitor to make a commitment to CNN.com as their primary source of news. Ad-supported sites should not pay more per click than they can realistically expect to generate in revenue from the resulting traffic over a very short time frame.

What about companies that are selling online? What can they afford to pay to acquire traffic?

A quick analysis suggests how they should set an upper limit on paid keywords. Let's say your paid search campaign has the following parameters:

Click-through rate . . . . . . . . . . . .1%

Cost per click . . . . . . . . . . . . . . .$5

Sales conversions from search . . 10%

Revenue per sale. . . . . . . . . . . . $50

Cost of goods sold . . . . . . . . . . .50%

A new customer generates $25 in gross margin but costs $50 to acquire. The break-even bid in this situation should be $2.50.

If the market says this keyword is worth $5, then the retailer should consider other options, because they will not stay in business long with paid search as their primary lead source.

No matter the type of site you operate, you must know when search bids have reached the limit of profitability. Then, your acquisition budget is better used for other online strategies, including search engine optimization, targeted online ads elsewhere, social media opportunities and other Web 2.0 solutions. The key for any of these tactics is to include a measurement component that tests the profitability of each campaign to select those that are bringing in positive cash flow and attracting profitable traffic.

John Keenan is managing partner of Anthem Marketing Solutions. Reach him at jkeenan@anthemedge.com.

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