Do PPC paid ads actually work for marketplaces?

‍‍The short answer is: paid ads don’t work for all marketplaces. 

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To determine their effectiveness for your specific case, various metrics such as Average Order Value (AOV), Take Rate, Payback Period, Customer Acquisition Cost (CAC), and Lifetime Value (LTV) need to be analysed.

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Marketplace Metrics Analysis 

Let’s take an example. Imagine you own an online electronics marketplace and are considering investing in paid ads to bolster the demand side. 

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Here’s a breakdown based on key metrics:

AOV (Average Order Value): $200

Take Rate: 10%

CAC (Customer Acquisition Cost): $50

LTV (Lifetime Value): $500

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Revenue from each order = AOV × Take Rate = $200 × 0.10 = $20

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Payback Period = CAC/Revenue per order = $50/ $20 =2.5 order

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Profit = LTV−CAC = $500−$50 = $450

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In this scenario, investing in paid ads seems logical as the LTV ($500) considerably outweighs the CAC ($50), and the payback period is reasonably short (2.5 orders). 

Some might have a higher CAC and lower LTV, making paid ads a less viable option. Thus, it's essential to analyze these metrics individually for each marketplace to make an informed decision.

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What if I haven’t run any Ads, and I don’t know my CAC?

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If you haven’t yet experimented with ads and are unfamiliar with your CAC, you can perform a basic calculation to estimate it using Google Ads. Here are a few steps with an example:

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1. Research relevant keywords for your service and the Cost Per Click (CPC).
2. Find the average Google ads Conversion Rate (CVR) for your industry
3. Estimate the CAC based on the average CPC and industry conversion rate.

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Several tools, such as Wordstream, Semrush, and Moz, are available for free and can assist in identifying relevant keywords and their CPC for specific target audiences or regions.

For the best results, having access to Google Keyword Planner inside Google Ads is ideal for finding this data.

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Here is an example for home maintenance marketplace keyword research using Google Keyword Planner. Here we have the top of the page bid low range and high range, which essentially represents the bid range for CPC.

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From this, you can calculate the average bid for the top page and use this as the average CPC value for your CAC calculation.

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Then, you can use the Google ads average conversion rate (CVR) from the table below for your industry to calculate your CAC.

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In our case, the Google ads average conversion rate for the home and garden industry is 4.26%.

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Estimate cost per conversion CAC = (average CPC* 100)/ CVR = (3.18*100)/4.26= £74.64 

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This rough calculation suggests an estimated CAC of £75 for Google Ads in the home and repair sector in Dallas, TX. 

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Remember, this is a ballpark figure. Real-world values may vary based on the type of conversions, such as payments or lead forms, and other factors.

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For Meta ads, there isn’t a one-size-fits-all calculation. The success of your ads will depend on various factors, such as audience specificity, competition, graphics and how you targeting of your ads. Running several campaigns will give you a better idea of the CAC and the effectiveness of your ads.

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Struggling without an active Google ad account for your marketplace? 

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No worries! 

Feel free to reach out or slide into my DMs for any help with keyword research or guidance through these calculations.