keyon - 5:46 pm on Feb 3, 2005 (gmt 0)

Sorry if I'm being naive, but after browsing this forum (and reading the suggested newbie threads), I'm still puzzled how AdWords advertisers are making reasonable ROI from affiliate commissions.

The average conversion rates I'm familiar with (in just about any given industry) seem to hover between 1-2 percent. When I look at an Adwords equation where I pay $0.25 per click, my numbers (see below) say that I'd need to bring in no less than $25 compensation on every conversion.

Sure, the $45 Ebay registration looks good. But what about all the other affiliate programs that pay 5-10 percent? If my $0.25 link to Amazon pays me only 5 percent commissions, a customer would have to
spend $500 to make it worth my while to run the ad. That doesn't seem likely at Amazon.

Am I missing something here?

Assume 1,000 clicks/day with average CPC of $0.25
1000 x $0.25 = $250 net cost Google AdWords
Apply conversion rate of 2% to this traffic:
1000 x .02 = 20 buyers
Average commission needed to break even:
$250(net cost) / 20 = $12.50
Average commission needed to make a reasonable profit (100% markup)
$12.50 x 2 = $25