Knowledge is the Foundation To Success  

Cost Per Conversion in PPC Advertising

Wikipedia defines Cost Per Conversion as an advertising and marketing term, describing the cost of acquiring a customer, typically calculated by dividing the total cost of an advertising campaign by the number of conversions. The definition of “conversion” varies depending upon the situation; it is sometimes considered to be a lead, a sale, or a purchase.

What is a Good Cost Per Conversion?

One question that will typically arise when talking about cost per conversion is: what is a good cost per conversion? Is it $5? Is it $10? Is it 20$? Or perhaps a good conversion is measured by a percentage of spend as it relates to your average sale value — so is 5% a good ratio between pay-per-click (PPC) advertising spend and revenue generated? Is 10%? Or perhaps even 20%? There is no real hard and fast answer to this, but many of our clients here at JumpFly like to use 10% as a solid measuring stick, in case you were looking for a typical ratio. So if you know your average order value is $100, you would look to get your conversion costs around $10 per order.

However, there are other factors that you should consider before deciding upon an acceptable cost per conversion. For example, how much is a new customer actually worth? How many times does a customer order from you within a year? If you know that most of your customers just order from you once and they rarely, if ever, order from you again, then you can use a flat 10% of average order value as a good benchmark for your conversion cost goal. But if you know the average customer orders from you 3 times a year, 5 times a year, or even more, then you really should factor that in to your cost per conversion goals. You may be short-changing your growth if you don’t consider what the total true value of a new customer is worth. You may be willing to push that conversion cost ratio to 20% of average order value, for example, if you know the average new customer orders at least twice from you within a year.

What is the Value of a New Customer? 

The value of a new customer is different for everyone, so you should look at your own average order value and the average number of purchases made by a typical customer before you make that final decision on what your cost per conversion goals are.

What is a new customer worth, especially in these tough economic times? Only you can decide for your business, but they might just be more valuable than you think.

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Everybody knows that Conversion Tracking is an excellent way to judge the individual performance of keywords in your PPC Advertising accounts and their ability to cause an action on your website, however as an E-Commerce business owner you may want more detailed information regarding the ROI from your various marketing campaigns. Google Analytics E-Commerce Reporting might be just the tool you need.

Google Analytics E-Commerce Reporting goes beyond regular analytics reports and can actually import sales data from your customers completed shopping cart transactions. Since Google Analytics already imports the data from your Google AdWords account, it can combine the shopping cart sales data with AdWords data to give you a very clear picture as to the ROI generated from your various campaigns, AdGroups, and keywords.

For example, while AdWords Conversion Tracking might report that the keyword “blue widget” converted 5% of the time for an average cost of $12/each, Google Analytics E-Commerce Reporting can tell you the E-Commerce Conversion Rate, Total Number of Transactions, Average Order Value, Purchased Products, Revenue Generated, Per Visit Value, and more. So, you might find out that the keyword “blue widget” generated 5,308 clicks however only 4,102 visits, with an average CPC of $0.22, converted 5% of the time, for 227 different transactions, with an average order value of $192.81, generating $43,768 in revenue, making the per visit value $10.67. It will even show an ROI of 6,796.13%, and an RPC (Revenue-per-click) of $15.37. Now that is data that you can use to really evaluate bidding and budgeting.

Google E-Commerce Reporting will show data for all sources of traffic including; Yahoo, MSN, Comparison Shopping, Direct Traffic, Referring Sites, you name it, it will track it. You won’t see cost data from these sources like you do when tracking AdWords campaigns, although you still see all of the other great data, which in my opinion is still more than enough.

Unfortunately, enabling E-Commerce Reporting in your Google Analytics isn’t as easy as flipping a switch in the settings, although that is exactly how you begin. First, you must go into the Analytics Settings/Profile Settings, and in the main website profile area you will need to click “Yes, an E-Commerce Site”, and then click save. This activates the functionality in the account, however two more things must be done before it will actually track sales data. First, a tracking code must be included in the receipt page, and then below the tracking code you will need to have your webmaster insert some customized calls that import the data from the shopping cart. If that sounds confusing, your right, it is, and it has caused many a webmaster to pull his hair out trying to get this code to work.

Luckily the code directions and an example of the code can be found here. There is also a great forum with plenty of users willing to help.

While the implementation of this Free Google Analytics feature is a little tricky, the reward at the end is well worth the effort for any business owner looking to see a more detailed picture regarding the ROI from his various online marketing efforts.

Last week I talked about a couple of business models that have a hard time earning a return on investment for their PPC advertising dollars. Today I want to point out some business traits that I have watched succeed time and time again.

Having an Established Business

First of all, business online and offline is always business. Where there’s a market and profit to be made, there is or will soon be competition, and PPC is no exception. I always say, “We can bring the horse to water, but we can’t make ‘em drink.” A well-managed PPC campaign should be structured to drive as much relevant traffic possible for a desired cost and/or budget. From there, the advertiser is responsible for providing a website which will promote visitors to take a desired action. For the most part, the companies that do well are those that are already doing well for themselves prior to talking with us. They already understand how to take care of their end of the deal once a targeted person walks through their door, or in this case, visits their website. Established businesses usually earn higher conversion rates. Some conversion-driving traits include credibility, integrity, understanding of market, understanding of competition, established customer service, clear purchase and return policies, a professional and user-friendly website, clear and relevant pictures and information.

High Profit Per Sale

Business models with a high profit per sale do well with PPC advertising. Realistically, most advertisers see conversion rates of 0.5% to 5%. If on a good day, 5 out of 100 visitors take action, you are paying for 95 visitors that did not. If your business has a high profit per sale, you can afford to pay for many visitors that do not take action, and still earn a good return on those that do. Example of high profit per sale businesses include: realtors, fee for service physicians, software sellers, B2B products and services.

Earning Repeat Business

Again, paying for visitors that take no action drives the need for making money from those that do take action. Businesses that routinely earn repeat business do extremely well with PPC advertising. These models can hit “home-runs,” meaning, for the price of one click, a new relationship can be born, earning years and years of loyal business and revenue. If your model earns repeat business, odds are PPC is right for you.

The Bottom Line – If you are an established company with good margins, and you earn lots of repeat business through building lasting relationships you can’t go wrong with PPC advertising.