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1) MAX PPC= CostPerOrder*ConversionRate
2) MAX PPC= ConversionRate*AverageSalePerPurchase
The problem is that the results are different. Here is a real example:
Client invests $200 in a PPC campaing. This investment results in 5 orders and $1000 in revenues. The campaign has produced 800 clicks.
Now if we use the formula #1 we have that:
CPO is $40 (marketing expenses/orders) and conversion rate is 0,63% then MAX PPC would be $0,25
If we instead use formula #2 we have that:
Conversion rate is of course the same 0,63% and the AveragSalePerPurchase is $200 (revenues/orders) then MAX PPC would be $1,26
At this point I am really confused! Anybody has an opinion on this?
Thanks a lot.
Jamned
Are you considering the profit made on each order?
The value of the order is not the most important issue, its how much profit you make.
To work out your ROI you need to know 4 factors.
You need to know how many clicks you get.
You need to know the cost per click.
You need to know what your average conversion ratio is (worked out as a percentage, so a 1 in 8 conversion = 12.5%)
You need to know the average "gross margin" of each conversion.
To work out your gross margin it's :
(Conversion rate * Average Sale value) - (Total click costs/Number of clicks)
So in the above if you had a conversion rate of say 2.2% and an average order value of $20 and spent $100 for 300 clicks this would become :
(0.022 X $20)- ($100 / 300) = (0.107 profit per click)
So in this case you'd be making just under 11 cents per visitor, or $132 in sales.
The formula on the left hand side is the important one, it's conversion * average sale value and this is what determines the maximum CPC. The bit on the right determines how much extra profit you can squeeze out of the deal. So if instead of paying 33 cents a click you could, by proactive management, get that down to say 20 cents a click with all other factors being the same then the formula becomes :
(0.022 X $20) - ($100 / 500) = (0.24 profit per click). So for your same 100 bucks you'd generate $220 in sales. Where you can score big time is in tweaking the factors right across the formula.
So for $100 budget if you could get say 5% more conversion, with 5% more margin, with 5% less cost per click (i.e. more clicks for your money)
(0.023 X $21) - ($100 / 526) = (0.293 profit per click). So we are now up to $254 in sales from our $100. Your budget is still the same but your ROI has gone through the roof.
I urge you to play around with these figures and try different pricing models and see whether you get better or worse conversions. This is why often being number 3 is much more profitable than being say number 1 because the numbers stack better for you.
Hope that long winded explanation helps.
You often get more repeat visitors from search traffic, and more people bookmarking. What is the value of that? What is the value of "loyalty" and how do you calculate loyalty?
There may also be other factors for each business to calculate. What is really valuable for the company? You might put a value on leads or other contact forms submitted, download of product documents or submission to e-mail newsletters etc.
Also, you want to find out more about what really bring your company value - long term and short term. Is it customers that purchase a lot at one time? Or do people that only by a little come back more often and in that way produce more long time value? If one visit from a search engine generate an average of 3 purchases over the time frame of 6 month maybe that should be counted in as well…?
Basically what I am saying is, that each business really needs to be evaluated separately to make accurate calculations on ROI :)
You are 100% right and you also need to put a value on "free", so if you give something away for nothing, ultimately that has a value in the equation.
Sales is obviously the biggest factor for most people and that was just a down and dirty way of working out basic numbers. All of the other factors you mentioned will add extra digits to the overall totals, but at least this tells you whether your headline rate is a profit or a loss.
Because we manage accounts for companies we use that as rough guide to show the fact that inspite of charging for the service the overall net effect is more ROI, and the impact of over-bidding on keywords to the the numbers can be astounding in high click volume keywords/groups.
If you really wanted to start confusing you can factor in all things like net margins, commissions, staff, any set up costs incurred, distribution costs if it's a physical product, marketing costs if it's an ezine. The list is endless. Different companies will go to different levels of detail and that is fine. Other things like claw-back, chargebacks, cancellations, replacement of faulty goods, bad payers, what a list you can come up with.
ROAS is a new buzzword. I don't know who came up with it, but it's a great way of eplaining the fact it's return on advertising spend this is concerned with.
There are many people involved with affiliate schemes who get clouded by the numbers. Work the numbers out using these and any other formula you can get your hands on and establish if it's worth pursuing the scheme or not.
> Different companies will go to different levels of detail
Excactly! You have to remember never to spend more on tracking and analyzing than what you actually profit :)
You have to remember never to spend more on tracking and analyzing than what you actually profit
Because we use OPM (other people's money) we are probably more conscious of that because without that profit we would become easy to dispense with.
Have you noticed that there are two distinct camps? The "track nothing but we seem to make money" camp and the "we're too busy tracking to be making profits".
When I worked for other companies it was meetings, I was forever getting called to meetings to discuss the fact that the company was having too many meetings....
If you want to calculate ROI for such a a company it will be negative no matter how well you do SEO :)
How much should you bid when you loose 20 cent on each visitor? LOL
I have come up with this long term forumla:
Become virtual, use IT to minimise your offline costs and maximise your coverage, covert the sales and over the long term you will be able to afford more CPC than your peers.
