Part of the answer to this discrepancy has to do with the different ways in which the two services record and report conversions. Bethany Bay at PPCHero.com has posted a nice, neat definition of those differences:
“AdWords assigns conversions using first click attribution whereas Analytics uses last click attribution. For example, lets say a person clicked on one of our PPC ads, viewed our products, went to a competing site to compare prices, then came back to make a purchase by typing our website into the search bar. AdWords would attribute the conversion to the time the PPC ad was clicked. Analytics however would attribute it as a direct goal conversion.” (Source)
By “Direct goal conversion” Bethany means the conversion is attributed (in the example above) to a click on a direct search result in Google, not the previous AdWords click. This is probably the primary reason why conversion numbers and revenue in Analytics segmented for paid search are usually lower than what is reported in AdWords. AdWords seeks to give credit to an ad click that may have occurred many days beforehand, if subsequently the same person visits the site by whatever means and makes a purchase, whereas Analytics only gives credit to whatever that person last clicked.
(I suspect another reason may have to do with AdWords many-per-click conversion tracking option, but we’ll save that for another post, another time.)
This points to something that anyone managing paid search accounts should always keep in mind: making a purchase online is still a very human activity, and humans rarely follow one exact route between initial desire and ultimate satisfaction of that desire. When we set up and evaluate our accounts we probably tend to think in terms of someone seeing our ad, clicking it, being won over by our dazzling landing page, and going on to purchase the product. But that is often not the reality, and sometimes may even be the minority case.
More often than not, someone clicking our ads is in the midst of a process that may involve any combination of shopping around and comparing by clicking various ads and/or organic results, looking at rating and review sites, polling friends both online and in “real life,” etc. Then, and often only then, if they have decided that we had the best value and/or best match to what they were looking for, will they return to our site to make the purchase. And they may come back by finding one of our ads (and not necessarily the one they had originally clicked), finding an organic result for our site, or even typing our URL into the browser address bar.
So keep in mind that many of your potential customers may take a circuitous path on the way to conversion, and may be at various parts of the buying cycle at the moment you ad comes into view.
Photo by Biking Nikon OGG on Flickr. Used through a Creative Commons License.