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Forget ROI

Just give me Profits

     
9:56 pm on Apr 3, 2004 (gmt 0)

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WebmasterWorld Administrator ewhisper is a WebmasterWorld Top Contributor of All Time 10+ Year Member

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I just finished putting together a report from some experimentation done with one of my accounts. I found the results interesting, and thought some here might find them interesting as well.

This is a site that I've been working on since pretty much the beginning of AdWords, so I'm very famaliar with the KWs and ads for it.

I often find that people look at ROI over the bottom line, when its the bottom line that means more to me.

Average Sale Price: Roughly $200 (Numbers have been rounded off so they fit here) CON Rate=Conversion rate.

AVG CTR Clks CPC Spend Profits ROI CON Sales
Pos Rate
1.1 16.5% 993 $3.25 $3227 $744 23% 2% 20
3.5 8.1% 512 $2.68 $1272 $1187 87% 2.5% 13
7.6 2.2% 122 $1.12 $136 $644 471% 3.2% 4

If we went by straight ROI, the 7.6 position is the way togo, however, position 3.5 makes $543 more over the trial period, and I'd rather have that bottom line. Even position 1.1 ends up with a higher profits than 7.6 with a much lower ROI.

As expected, there is a significent conversion difference between the various positions. The CTR of the ad in the premium position, admittedly, did suprise me. And therefore the CTR difference between position 1.1 and 3.5 was quite significent. The CTR of position 7.6 was around my projections.

But we really aren't done yet. This site's visitors usually buy more than once during a year, without going through the math of actual returning customers, I'll simplify it saying that it averages 1.3x per customer per year. So
1.3 x $200 x #Sales - AdWords spend
is what we should consider. This leaves us with this profit:

1.1 position: $1972
3.5 Position: $2007
7.6 Position: $903

Clearly 3.5 is the best position for this particular product. However, (and this is where egos come into play), the difference between being first and on the side is minimal, and those would be sales that your competitor didn't get. If the projections were made into year 2, then position 1.1 is definately the way togo as those returning in the 2nd year will definately make the profit margins worthwhile.

However, position 1.1 must maintain that conversion rate. Any drop with that CPC and the site will quickly get into trouble. Position 3.5 can drop the conversion rate a little and still be quite profitable due to it lower spend than the premium position. In fact, if its conversion rate drops to 2%, its still as profitable as position 7.6 in the short run, and better in the long run.

If this site offered a newsletter to keep in contact with former buyers and help to increase the average buys/year/customer, then I would definately suggest the top position for the sheer volume of sales and therefore, a higher projected number of signups than the other positions.

In any case, enough ranting for now, don't measure everything by ROI. It is definately a measuring tool to be used, but don't forget about the bottom line.

10:34 pm on Apr 3, 2004 (gmt 0)

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WebmasterWorld Administrator skibum is a WebmasterWorld Top Contributor of All Time 10+ Year Member

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Great info eWhisper!

Other things to keep in mind for many companies might be offline sales, telephone sales, and catalog sales that are often not tracked back to search advertising campaigns.

Throw those things into the ROI/Profit calculations if they are not already in there and the ad campaign as a whole is often seen in an entirely different light.

10:35 pm on Apr 3, 2004 (gmt 0)

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Hey,

Interesting. This must be your own product. I can't get this kind of data when dealing with Aff Products.

C.K.

10:56 pm on Apr 3, 2004 (gmt 0)

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It all comes down to budget. Theoretically even if you spend $10,000 and make $10,100 you should do it. Not everybody may be able to saturate the ad market given their budget, however. It is true what you say, if you have the $ for it.

Otherwise:
A) Find all profitable ads
B) Activate by decreasing ROI until your budget is strained.
C) Don't be afraid to borrow capital if possible, as long as you KNOW the return is there and it increases your bottom line long-term. (Companies often get hung up here)

Takes $ to make $.

(Hmmm, I think I just condensed half the adwords books out there in a paragraph...)

11:25 pm on Apr 3, 2004 (gmt 0)

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Thanks eWhisper.Great post
just starting out in the world of ppc with our own product of similar average sale value so very relevant.
Thanks
MM
11:48 pm on Apr 3, 2004 (gmt 0)

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eWhisper, excellent analysis, and an execellent example of how good marketing reduces the conversion rate (contrary to Frederic Marckini's views in his recent ClickZ article, Ass-Backwards SEM [clickz.com])
4:35 pm on Apr 5, 2004 (gmt 0)

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Great post eWhisper! If anything, it shows how important measurement is to any and evey campaign, right down to the smallest detail.
6:35 pm on Apr 5, 2004 (gmt 0)

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Theoretically even if you spend $10,000 and make $10,100 you should do it.

Part of the analysis I left out as it gets into a lot smaller details (like shipping costs, bandwidth, etc), is cost per hour of managing an account.

I can't imagine spending that much and it not taking quite a few hours a month to manage. At that point, I'd actually be losing money as I could be working on something that will net me more per hour.

However, the point is well taken, if you find the market thats profitable to you, then go for it.