The beauty of Internet Marketing is that it is the only marketing that is 100% measurable. You can know how many people see your ad. You can know how many visited your website. All this makes calculating ROI possible. And sooner or later you will calculate the feasibility of using Paid Search to sell your products online.
How to calculate ROI for a PPC or Paid Search Campaign is something everyone learns usually after they already spent too much money. While there is plenty of information online about how and why you should include PPC in your online marketing strategy, the ROI parts are few and far between, and reading all the marketing material is akin to drinking from a fire hydrant. There is an easier way to ascertain your Paid Search ROI.
1) Profit Margin and Sales Volume: Start first with your business model. How much profit do you make on each product you sell online. In some cases the question is how many must you sell online to make the business viable. Lets say we have a $100 product which at this point has a profit of $30. That 30% margin is what we can “play” with for our PPC marketing.
Include the online transaction costs and fulfillment costs (delivery costs) as well. Don’t forget to include the cost of any other Internet Marketing you might be doing, including any SEO or web site development. You may even want to total the cost of your website expenditures to date, if you are a real astute break-even-analyst-type. Now you have the total amount of money you could spend to attract a buyer via PPC.
2) Conversion Rate: You may already have statistics from your analytics that indicate the conversion rate of your website. Lets say that the conversion rate is 5%, or for every 1000 visitors you sell 50 products on your website.
If your website conversion rate is over 14% you either need to double check your measurement method(s) or you don’t need to read this because you are an expert at this game already. If you don’t know the conversion rate of your website (because it is new and gets no natural search traffic yet, and thus why you must acquire customers via PPC) you can run some low risk (inexpensive) tests to determine the conversion rate and thus the viability of using PPC to grow your business online. In order to keep this post on target, I describe the low risk methods to determine your website conversion rate there. If you don’t read that page, heed this: GO SMALL and GO SLOWLY and DOUBLE CHECK SETTINGS. If you are new to PPC, its very easy to blow your entire budget in a day (sometimes an hour) because you overlooked one simple setting.
3) Visitor Acquisition Value: If you make $30 per sale and 5% of the visitors to the website buy the product, that means each visitor is worth $1.50
(50 sales x $30) / 1000 visitors = $1.50 | This number is also considered your Maximum Cost Per Click, over which, you’ll loose money.
4) Value Proposition for PPC justified! That seems easy. You can now fantasize about growing your business to Fortune 100 status because you can spend $0.75 per click, and with a 15% margin, make more and more money because you can afford to increase your marketing spending as your sales volume rises. Brilliant!
Not so fast cowboy. Even if all that is accurate, there are a few barriers to success that you will become aware of.
If your Maximum Cost per Click is less than $0.50, a PPC campaign for your product may not be viable – because getting clicks for under $0.50 may simply not work. Although Google and Microsoft (and Facebook) advertise that you could pay as little as $0.05 per click, that cost per click is seldom attainable, even in markets where little to no competition exists. You can try it, but be aware of the potential for disappointment – that you just won’t get clicks for less that $0.50 no matter what the marketing material says.
Average CPC barrier: The average CPC of your industry may mean you get no exposure bidding $0.75 per click. In fact your ad may not display at all even at a $1.50 bid because the average CPC for your industry is $4.50. Which means the top 6 positions (where you need to be to acquire the maximum number of clicks) may cost $6.00 per click. There goes the ROI.
Search Volume limitation: As pointed out in #1, the question may be “how many must you sell online to make the business viable?” Your product may simply not have that much online demand. Although you could expand your business if you could get 3000 visitors per day, they don’t exist! If only 1500 people search online each day for your product, no matter how good your Paid and Natural search positions are, you cannot get 100% of those visitors to your website. They clicked on the other ad or listing and somehow got distracted and…they are gone forever. So you manage to get 900 visitors each day: redo your ROI calculations.
At this juncture you should consider ways to increase conversion on the website. That can have huge implications for the viability of using PPC to grow your business online. But keep in mind that improvement potential is not infinite. Some of the very best online businesses struggle to get 15% conversion. Between 2% and 6% are normal, and you can feel very good if you get over 8% conversion.
But don’t give up just yet! There are tricks that can lower your cost per click or increase your click-through-rate on ads. Unfortunately there are no tricks I know of that apply universally to all industries. One example that works amazingly well in one industry is to use the term “Sale Ends Monday” in the ad. That trick increases CTR by 30%. Another trick that works well for high-end products is to target wealthy neighborhoods only, which greatly improves the conversion rate per click, which means lower overall CPC. And there are lots more. The potential to find a trick that changes your ROI calculations are seemingly infinite. But you have to know how to use Adwords and Adcenter expertly and you have to experiment.