25 cent cost per clicks have grown to $2-$6, and people's natural ability to ignore advertisements result in paltry click-through rates. Running several experiments over a two week period yielded a 0% conversion rate on 200+ clicks across multiple keywords and nearly $300 spent. In comparison, over the same period, the inherent network effects of our application resulted in a 10%+ conversion rate at a cost of $0.
The key problem with AdWords is that it's a terrible tool to use for marketing a product that doesn't have an established market. If people don't know that the market exists, they can't search for a product that services that market. Fortunately for me, I used AdWords as an experiment to prove this very point, so the loss of $300 can be viewed as market research cost rather than a sunk one.
This is why it's extremely important to find what Eric Ries calls the "engines of growth" for your company. It's not enough to simply build a great product and expect that search engine traffic will do the selling for you. You need to understand the market you're entering and the best way to reach and grow your user base in that market. AdWords is also an expensive way to acquire customers, so you'll have to consider the lifetime value of a customer against the average acquisition cost to determine if it's viable. On the plus side, AdWords is great for running keyword experiments to determine the number of impressions various keywords garner and which generate the highest click-through's. The challenge is determining which clicks actually correspond to your product offering, which would typically be measured via the conversion rate. The problem here is that low volume of click-through's make for poor statistical data, and there is always the chance that your website copy fails to properly convey the value proposition. That being said, these experiments are best run once you've had a chance to perform some degree of quantitative and qualitative optimization on your landing page.
Don't get me wrong, AdWords still has value, otherwise companies wouldn't spend billions of dollars on it. Just expect to compete fiercely for clicks, pay heavily for them, and fail miserably if you're establishing a new market. So my advice for most startups is fight for organic traffic, get social, generate referrals, build virality into your applications, and use AdWords as an experiment rather than a strategy.
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