The numbers don't add up!!

by kuku
23 replies
In this post I examine the possibility of promoting an affiliate website with PPC traffic.
I am going to discuss one live example, but there are actually more who do this, SO - it probably does make profit. I could just try it out, but would like to ask first anyway.

Let's go:

Disable your ad-block plugin.

Google this term:
free web hosting

Please avoid clicking it (just copy/paste the domain to the address bar)......
Now, can you see the advertisement for the domain "top10bestweb....."?

Examining the landing page (it's actually the index page) there's a list of affiliate links to paid hosting. Nothing more as far as I can tell. There's an opt-in mailing list at the bottom of the page though.
Let's take hostgator.com from that list as an example.

In CJ I see that the 3 months EPC is $41 for hostgator.com (avg. 100 clicks produce). Each sale grants the affiliate $100.
In Google's Keyword Planner I see that the CPC is about $10 (USA).

Now, mathematically that means that this advertiser is losing money!
Why? Because he spends (100clicks x $10 = $1000) in order to generate $41.

Am I wrong? What did I get wrong? How am I wrong? What is the incentive of the above advertiser? Why would this advertiser choose to do that?

What do you think?

Maybe the PPC that Google's Keyword Planner is not the real, final, PPC price? I've seen opposite cases where I was suggested by Google's Keyword Planner to bid $1 but then the ads did not show, unless I would double and even triple that.

Shana tova
#add #numbers
  • Profile picture of the author Raydal
    This could be a "loss leader". You can lose money on the initial sale
    knowing that you'll make money later on from the same customer. Hosting
    involves renewals, so the advertiser should make money in the
    future.

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  • Profile picture of the author Alexa Smith
    Banned
    Originally Posted by kuku View Post

    There's an opt-in mailing list at the bottom of the page though.
    How are you going to try to assess the value of someone else's listbuilding?

    Originally Posted by kuku View Post

    Now, mathematically that means that this advertiser is losing money!
    You have no way of knowing that, because you don't know the value of his listbuilding.

    The value of subscribers isn't worked out "on the day they arrive on your site": it's measured over a far longer period than that. Whatever size lettering you use to make your statements here.

    Originally Posted by kuku View Post

    Am I wrong? What did I get wrong?
    Maybe you based your calculations on only an immediate perspective, instead of looking at the longer term?

    Shana tova.

    .
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  • Profile picture of the author jemacb
    KuKu unfortunately it is not so simple as Black & White. In other words, the advertiser may have other objectives other than making a profit from his /her initial advertising spend.

    From a strictly numbers approach, you are not incorrect. But I am sure that the advertiser's objective was more than that.

    Another thing, you are going to now make the advertiser spend more money by asking us readers go to visit his / her site by clicking on the ad. :-) Was that pre-planned? haha
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  • Profile picture of the author kuku
    @Raydal: I don't think so because the affiliate program details in CJ state:
    Number Of Occurrences: 1
    Commission: 100.00 USD flat

    @Alexa Smith: I did try to think about the long term option, that this advertiser might count on, but, this mailing list really doesn't seem to be promoted across the site. I'm sure there's something else here..
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    • Profile picture of the author Alexa Smith
      Banned
      Originally Posted by kuku View Post

      I did try to think about the long term option, that this advertiser might count on, but, this mailing list really doesn't seem to be promoted across the site. I'm sure there's something else here..
      Yes, I hear you there ... and your comment about the inconspicuous nature of the opt-in did give me some pause for thought. However, there are other possibilities, too? Ray's point above, about hosting being a "recurring" thing is a good one, for a start? And there's also even the possibility that someone very inexperienced is testing something and won't be doing it for long? (In general, it doesn't pay to assume that something's necessarily profitable, just because you see someone apparently doing it?).

      .
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  • Profile picture of the author agmccall
    Your first mistake is to consider using adwords.

    In my opinion, adwords is for later on in the life cycle of your website

    al
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  • Profile picture of the author JohnMcCabe
    There's another error in your analysis.

    You said that the landing page was a list of 10 affiliate links, yet you based your conclusion on 1 program. You're not accounting for how well the other 9 links are or are not performing.

    You also may be misinterpreting the cost per click. Last time I looked, Google was in the business of auctioning off ads. The cost/click you see is what it would cost you to be in the #1 slot at all times. There have been multiple pieces published by PPC experts who say that you may be more profitable being in the #4-#6 position, as you get fewer "curiosity" clicks than you get at #1.

    If this campaign has been going for any length of time, the person running it is either making money and you are not seeing the whole picture, or they're a fool with too much money to throw away. My bet is on the first one.
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  • Profile picture of the author kuku
    @Alexa:

    1. This affiliate program does not offer recurring commission. I assume this site participates in the same program I see on CJ. And that program states: "Number Of Occurrences: 1".

    2. This site is 3 years old. I find it unlikely the owner is an inexperienced marketer.

    3. This site's "sitemap.xml" lists many pages. Much content implies efforts. Was it for nothing?

    4. archive.org shows they have been promoting affiliates for quite some time.

    5. They use advanced technology like CDN. Again, efforts.

    Now, crossing in my mind all the above indicates (not 100%, I agree) that they do advertise this site for quite some time.
    In other words, it doesn't look like they are testing / experimenting for some reason. No?

    P.S
    Thanks for my first "Thank You"
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  • Profile picture of the author kuku
    @JohnMcCabe: You're right and wrong, I didn't mention it, I am accounting for how well 8 (1 is not in CJ) of the other affiliates do in 3 months EPC. I can tell you that they are doing less than hostgator.com. For example, web.com stands at $38. And it keep going down.
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  • Profile picture of the author RyanJohnson1
    you're not factoring in that the advertiser could be getting paid more than $100 per sale...
    I know for sure that if you sell more than 21 hosting plans per month with hostgator then you're bumped up to $125 if you are a direct affiliate...

    this affiliate maybe getting even more than $125 - $150 per transaction based on volume...

    And #2 typically google's estimated ad planning usually always projects a higher than what you actually pay price in my experience.

    If this person has been running their site with google ppc and they have a great quality score they maybe only paying a fraction of the suggested and projected ad cost.

    Also the affiliate might have a deal with the vendors and get a part of their backend revenue as well...
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  • Profile picture of the author kuku
    @Alexa:
    By the way, this site does not rank for that keyword, nor for others I was searching for, so its traffic is paid for, AdWords.

    In addition, their affiliate links are actually another page, not an HTTP 302 redirect.
    On that page, in it's source, you can see stuff like:
    1. Remarketing related code
    2. Split testing (look for "splitTestVariants")
    So I actually have the impression they know what they're doing.
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  • Profile picture of the author MYDCOM
    The math doesn't add up to the outside person looking in. Since we don't know the actual numbers.

    This advertiser may be on a higher commission level and whatnot.

    The bottom line is, nobody is crazy enough to spend thousands of dollars if they are not making money somehow.

    So this advertiser is definitely making money. And only he has the real numbers to do the calculations.
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  • Profile picture of the author MikeMiller
    Without spending too much time on research, I think you might be quite wrong with your numbers. Sticking to your hostgator example:
    In CJ I see that the 3 months EPC is $41 for hostgator.com (avg. 100 clicks produce). Each sale grants the affiliate $100.
    In Google's Keyword Planner I see that the CPC is about $10 (USA).

    Now, mathematically that means that this advertiser is losing money!
    Why? Because he spends (100clicks x $10 = $1000) in order to generate $41.
    I have checked CJ and $41 EPC is right, and will just believe the $10 CPC. There was one number which highly effects the whole calculation - actually makes it work or not - and I don't see where you got it from! You wrote that 100 clicks produce one purchase, and based your calculation on this.
    Now I really don't see how you could know that.

    The website in question uses the simple textbook affiliate review site model. As @Alexa Smith mentioned, the lifetime value of customers could worth much more than the initial sales value. Actually in most cases it does. However, it's not the case here.
    This site uses basically no list building techniques. The sign-up field at the bottom just looks like someone told them that they should have a list, so they threw a sign-up field to the least disturbing place of the site: at the bottom.

    They let you compare hosting solutions, and quickly direct you to the hosting company's website with an affiliate link. No list building, no recurring sales, just plain, simple, one-time affiliate revenue.
    (as I've checked a few hosting companies in CJ, I've seen that they don't offer recurring commission, just a flat one-time fee)

    What you don't know however, is the conversion rate of the website itself. That however is the most important factor here. If they convert let's say 30%, meaning they send 3 visitors out of every 10 further to the hosting company's website, it would mean, that:

    if they spend $1000
    they get 100 visitors to "toptenbest...com"
    out of which they send 30 visitors to hostgator.com, and other hosting companies
    where they get ~$40+ EPC in affiliate earnings (for example the website's list leader web.com - probably the highest converting one on toptenbest...com itself - has a 7 day EPC of almost $54)
    which results in 30*40+=$1200+ earnings
    netting in $200+ profits for 100 clicks

    Now, you can see how much they own conversion rate effects the calculation, and I'm pretty sure that they are much closer to 30% than to the 1% which you used. Actually me myself almost went with web.com offer on the affiliate link, although I'm pretty happy with my hosting company

    Combined EPC is probably higher than $40 dollars, but if you calculate with that, and stick with the $10 CPC, it means that any conversion rate over 25% will be profitable.
    If the combined EPC is higher, it means that lower conversion rates will be still profitable.

    Also keep in mind, that this site is probably a well-performing high-spending long-time 1st place advertiser for these terms, which means, that their CPC will be significantly lower with good AdWords campaigns, than what you see in Keyword Planner. And lower CPC will also mean, that lower conversion rates will be profitable.
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    • Profile picture of the author RyanJohnson1
      Originally Posted by MikeMiller View Post

      Without spending too much time on research, I think you might be quite wrong with your numbers. Sticking to your hostgator example:


      I have checked CJ and $41 EPC is right, and will just believe the $10 CPC. There was one number which highly effects the whole calculation - actually makes it work or not - and I don't see where you got it from! You wrote that 100 clicks produce one purchase, and based your calculation on this.
      Now I really don't see how you could know that.

      The website in question uses the simple textbook affiliate review site model. As @Alexa Smith mentioned, the lifetime value of customers could worth much more than the initial sales value. Actually in most cases it does. However, it's not the case here.
      This site uses basically no list building techniques. The sign-up field at the bottom just looks like someone told them that they should have a list, so they threw a sign-up field to the least disturbing place of the site: at the bottom.

      They let you compare hosting solutions, and quickly direct you to the hosting company's website with an affiliate link. No list building, no recurring sales, just plain, simple, one-time affiliate revenue.
      (as I've checked a few hosting companies in CJ, I've seen that they don't offer recurring commission, just a flat one-time fee)

      What you don't know however, is the conversion rate of the website itself. That however is the most important factor here. If they convert let's say 30%, meaning they send 3 visitors out of every 10 further to the hosting company's website, it would mean, that:

      if they spend $1000
      they get 100 visitors to "toptenbest...com"
      out of which they send 30 visitors to hostgator.com, and other hosting companies
      where they get ~$40+ EPC in affiliate earnings (for example the website's list leader web.com - probably the highest converting one on toptenbest...com itself - has a 7 day EPC of almost $54)
      which results in 30*40+=$1200+ earnings
      netting in $200+ profits for 100 clicks

      Now, you can see how much they own conversion rate effects the calculation, and I'm pretty sure that they are much closer to 30% than to the 1% which you used. Actually me myself almost went with web.com offer on the affiliate link, although I'm pretty happy with my hosting company

      Combined EPC is probably higher than $40 dollars, but if you calculate with that, and stick with the $10 CPC, it means that any conversion rate over 25% will be profitable.
      If the combined EPC is higher, it means that lower conversion rates will be still profitable.

      Also keep in mind, that this site is probably a well-performing high-spending long-time 1st place advertiser for these terms, which means, that their CPC will be significantly lower with good AdWords campaigns, than what you see in Keyword Planner. And lower CPC will also mean, that lower conversion rates will be profitable.
      Mike's on the money $$$
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  • Profile picture of the author MikeMiller
    Wow, it took some time to write my answer, and 7 new replies came in while I was writing it
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  • Profile picture of the author Brent Stangel
    By the way, this site does not rank for that keyword, nor for others I was searching for, so its traffic is paid for, AdWords.

    In addition, their affiliate links are actually another page, not an HTTP 302 redirect.
    On that page, in it's source, you can see stuff like:
    1. Remarketing related code
    2. Split testing (look for "splitTestVariants")
    So I actually have the impression they know what they're doing.
    Do you just have nothing better to do?
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  • Profile picture of the author drewfioravanti
    There are more holes in your hypothesis, aside from what has already been discussed...

    First, the bid the Keyword Planner is showing you is never the price a good advertiser pays. I have campaigns running in AdWords where the keyword page is telling me that my bid is too low for the first page. And the first page bid is $8+. Yet, my ad rank is 3.3 and I actually pay an average of $0.83 per click.

    Google gives significant discounts to advertisers whose ads get clicked the most.

    Second, your math says that 100 AdWords clicks cost $1,000 (100 x $10). That is correct. But then you assume that all of those 100 clicks actually click on that specific affiliate link. I assure you that is not the case. The numbers CJ is showing you is per 100 clicks to the offer. I've never seen a 100% click through from ad to offer. Ever. Especially if there are 10 other options available. Also, it is likely that someone looking for web hosting pricing will click on more than one link per visit while they are "shopping".

    Third, you assume that this particular advertiser's conversion rate is "average". It could be significantly higher than $41 per 100 clicks. It could also be lower.

    There are too many unknown variables to be able to determine the effectiveness of an ad campaign, unless you are the one running and tracking it.
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  • Profile picture of the author kuku
    @RyanJohnson1:
    You got good points there.

    Actually, the ads have a good score, maybe that gets the advertiser a discount of some sort.

    Also, you suggest the owner do have special affiliate terms.
    If that is really the case, he still got some tough margins to beat here, more like a casino.
    If for example he gets $200 per sale, he still loses. That's because he earns $82 for every $1000 he spends on advertisement.

    @mikeMiller:
    "You wrote that 100 clicks produce one purchase, and based your calculation on this."
    No. The program's EPC is $41. On average every 100 prospects I send to hostgator.com produce me $41. Now in order to get 100 clicks to my website I pay $1000 to Google. See? Now that I think of it, this assumption was wrong in the way that it assumed that 100% clicks from ads to my site would result in 100% clicks to affiliates, which is probably not the case.

    "so they threw a sign-up field to the least disturbing place of the site: at the bottom"
    Totally agree!

    "just a flat one-time fee"
    100% correct.

    "What you don't know however, is the conversion rate of the website itself"
    Correct, I did base my calculation on the reported CJ 3 months EPC. Obviously it could be lower because there are other affiliates participating the same program.

    "meaning they send 3 visitors out of every 10 further to the hosting company's website"
    And you assume that these 3 visitors successfully convert. Conversion rate of 100%. But the reported EPC suggests MUCH lower conversion rates, $41 per 100 visitor to be exact. Am I wrong? I think you're right all the way to this point, where you confuse, no?



    @Brent Stangel: Hahaha I ask myself the same question!

    @drewfioravanti: You are 100% correct, especially about the CTR issue that I "fixed" myself above in this reply - that wrong assumption actually made the calculation a bit more optimistic. How do you explain this huge gap (x10) between your campaign's suggested bid to actual price?
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    • Profile picture of the author MikeMiller
      Now you see, that I'm not really in the affiliate game , I've just worked the numbers, and assumed, that EPC means (average) earnings per click, and calculated with that. Of course per 100 clicks makes the math to add up harder, but it can still work.

      The EPC actually suggests that about 1 of every 200 visitors convert on the affiliate partner's site (we still don't know how many visitors the toptenbest....com site itself converts). The EPC is around $40, and the flat rate commision is $90-$100 for one conversion, so only 0,5 out of 100 visitors generate commission.

      There are still two important factors:
      The EPC is a CJ-wide average, and contains statistics form a lot of low-performing affiliate partners as well. Many of those partners have websites or lists in quite unrelated, or just slightly related topics, and just give hosting affiliate offers a try to generate a few bucks.
      This is not the case however with toptenbest...com. They are very-very relevant to the actual affiliate offer, and also their keywords are very relevant. If someone searches for hosting related terms, they most probably look for some kind of hosting. For someone like this a toptenbest....com-like review and comparison site is probably the best option to compare the offers, so a huge percentage of visitors will go through the offers and convert eventually.
      And from toptenbest....com's point it doesn't really matter whether the visitor goes with the 1st or the 10th option in the list, as long as they check them one-by-one, and come back to toptenbest...com, to check the next (by clicking on another affiliate link). They will still mean one visitor-one conversion for toptenbest....com, just will have more pageviews and more time spent on the website (but they probably don't really care about that).

      If this website can actually convert let's say 1 out of every 3 visitor for one of the affiliate offers on the site, than with 90$ flat-rate commisions, it would mean:
      $90/3=$30 average commision for one clickthrough, so their own EPC would be like 30*100= $3000, if my calculation is correct.

      There's also the question of CPC:
      As @drewfioravanti said, the actual CPC costs could be very very far from the CPC suggestion of keyword planner, especially in case of such high-spending and good-performing advertisers as toptenbest...com. I assume, that they spend a lot, and perform good, because their ad is in the 1st place for a quite competitive keyword.

      Google is great in understanding how it really makes revenue from advertising, and thus favours those with older, high-spending, good performing (meaing quality score and CTR) accounts over others.

      Google's revenue is clicks*bids. If someone with a poor ad but a high bid of $10 would get in the first position, and would generate say 1 click out of 1000 impressions, Google would get $10 revenue.
      If someone with great performance, great quality ad (which they can determine by historical data and other factors), but a much lower bid of $0,5 would get to the 1st position, but would generate 10% CTR, meaning 100 clicks for 1000 impressions, Google would still get $50 revenue, 5 times as much as with the other guy, with the 20x higher bid.

      Originally Posted by kuku View Post

      @mikeMiller:
      "You wrote that 100 clicks produce one purchase, and based your calculation on this."
      No. The program's EPC is $41. On average every 100 prospects I send to hostgator.com produce me $100. Now in order to get 100 clicks to my website I pay $1000 to Google. See? Now that I think of it, this assumption was wrong in the way that it assumed that 100% clicks from ads to my site would result in 100% clicks to affiliates, which is probably not the case.
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  • Profile picture of the author drewfioravanti
    Google gets pad per click on search. If I bid $10 and my ad never gets clicked, Google makes $0.00. If I pay $0.83 per click and my ad gets clicked 100 times, Google makes $83.00.

    Google wants more ads clicked, so they give preference to ads that get clicked. They also give you a discount for getting more clicks.

    Google also has a responsibility to the searcher. If their searchers continue to click on the same ad, Google assumes the product is good, relevant and a benefit to their searchers, so they want to show that ad more often, as it is one that their searchers want to see.
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  • Profile picture of the author PBScott
    One of the things that most people do not realize is that many many websites are throwing away money on advertising. They pay too much for keywords and do lose money... at least in the short term. This drives up the prices and makes it near impossible for short term profits.

    One day after they pay for hosting for a few years, they might recommend them to a bunch of other people, and or join the affiliate program and give back to the original advertiser... however they may not. There is a gamble there. Lots of big businesses do overspend and go out of business in this world, and again this makes it very difficult for those with a more conservative, and safer advertising plan.

    One of our competitors spends enormous amounts of money on poorly targeted advertising, and has done so for years... I expect, and hope they will go out of business one day soon.
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  • Profile picture of the author juk123
    You have no idea what the exact keywords are that the advertiser is bidding on or the CPC for each keyword so unless you have that info and a load of other information you can't say whether he/she is losing money or not.
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