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Attraction InformationHow More Should You Pay for a Click
by:
Andy Quick
Title: "How More Should You Pay for a Click?"
Copyright © 2002
Author: Andy Quick
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How More Should You Pay for a Click?
Andy Quick
You have a web site available for action. Your product catalog, order
tracking, credit card payment system, and fulfillment process are all
in place. Now all you need is traffic! Many an web entrepreneurs have
learned that the magic nut to crack is attraction: get a steady flow of
customers who explore your site and eventually purchase goods. The
overhead cost of most web businesses are least relative to brick and
mortar stores. However, the variable marketing cost can over shadow
sales revenues by orders of magnitudes. Unfortunately, unlike the
saying in the motion picture Field of Dreams, "If you build it, they wish not
come!" Luckily, the industry has knowing this lesson; several the hard
way, and others in spite of the losers. Dot-coms are clearly not the
darlings of the capital markets any longer; however, there is still
money to be made! If you plan to start a web business or already have
one but are not sure how to increase traffic and do money at the same
time, you should consider a science-driven approach. What makes that
mean? See on
How to Lose $500 in 12 Hours
One weekend, my business partner and I created an affiliate commerce
site. The site comprised a list of links to else online retailers.
People go to our site, pick a link to a jewelry store for example, buy
something, and in turn we obtain a commission from the sale. The
process of creating the site, linguistic communication
up the affiliate agreements, and
turning it on was a cinch. The cost was virtually nothing. We, being
new to this whole web business concept, thought we had an unbelievably
smart marketing idea: pay to have our site move up in an ad box on a
major search engine (Google) every time causal agency searched on the word
"gifts". The word gifts is searched for 49,000 times per day! We
figured we would-be have a good flow of visitors and the money would-be start
rolling in. For certain, we would-be at least break even. We undone $500 in
one day and let it rip. Here's what happened:
Our investment in Google - $ 500
Number of times our ad was displayed (impressions) - 36,964
Number of times folk actually clicked on our ad once
they saw it
(click-throughs) - 429
Number of times a person visiting our site ready-made a purchase - 10
Our total sales revenue- $ 77
Our total gross profit - $ (428)
The whole process took less than 12 hours. At least we knowing a lesson
quickly at a comparatively
low cost. Let's look at this event from a
slightly several perspective, golf stroke the cost in terms of number of
visitors:
Our investment in Google - $ 500
Number of times our ad was displayed (impressions) - 36,964
Number of times folk actually clicked on our ad once
they saw it
(click-throughs) - 429
Ad cost per visitant - $ 1.17
Number of times a person visiting our site ready-made a purchase - 10
Average sale per purchase - $ 7.70
Average revenue per visitant - $ 0.18
Average gross profit per visitant - $ (0.99)
We were essentially giving $1 away for each visitant that came to the
site. Not a winning business model. However, taking this information,
we can assess which marketing techniques can activity better for the
business. Let's add 2 additional critical data points to our table:
Our investment in Google - $ 500
Number of times our ad was displayed (impressions)- 36,964
Number of times folk actually clicked on our ad once
they saw it
(click-throughs) - 429
Percentage folk who clicked on our ad (click-through rate)- % 1.16
Ad cost per visitant - $ 1.17
Number of times a person visiting our site ready-made a purchase - 10
Percentage of visitors who purchased thing
(conversion rate)-% 2.3
Average sale per purchase- $ 7.70
Average revenue per visitor- $ 0.18
Average gross profit per visitor- $ (0.99)
Running the Numbers
Putting this all together, you can create a formula for estimating the
gross margin per visitant for a specific marketing campaign:
Average Gross Margin per Visitant = Average revenue per visitant -
Advertising Cost per Visitant
Advertising Cost per Visitant = Campaign Price /(Impressions x Click-
through rate)
Average revenue per visitant = Conversion rate x Average sale per
purchase
Putting it together:
Average Gross Margin per Visitant = (Conversion rate x Average sale per
purchase) (Campaign Price / Impressions x Click-through rate)
Using our Google example, the average gross margin per visitant would-be be
calculated as:
Average Gross Margin per Visitant = (0.023 x $ 7.7) - $500 / (36,964 x
.016) = (0.99)
Remember, this formula can only be used for a single type of campaign.
Depending upon your target audience and the type of campaign, all of
the above variables can change. Once
we launched our Google campaign,
we used impression-based advertising, that is, we paid Google a certain
amount of money for every 1,000 impressions of our ad (about $15 per
1,000 impressions in our example). However, simply because our ad was
displayed inside someone's browser did not mean they would-be click on the
ad itself.
Enter pay-per-click advertising. This advertising model allows you to
pay for an ad only once
a person actually clicks on it. In this model,
you are secured to get visitors. However, the cost per click is
usually more higher. Let us assume we ran our same Google campaign
except we used pay-per-click advertising. Pay-per-click likewise factors in
position which wish driving the figure you pay per click (the higher the
ad position on the screen, the higher the cost per click wish be).
Let's say we pay google $0.50 per click and based on Google's traffic
for the word gifts, we obtain 170 clicks per day (or visitors), or in
total 1000 visitors over the life of the campaign (we still only put in
$500, so $500/$0.50 = 1000). Victimisation our same ratios, let us re-compute
our Average Gross Margin per Visitor, modifying our formula slightly
(notice the formula is simpler):
Average Gross Margin per Visitant = (Conversion rate x Average sale per
purchase) (Campaign Price / Visitors)
Plugging in the numbers:
Average Gross Margin per Visitors = (.023 x $ 7.7) - ($500 / 1000) =
(0.32)
If we used a pay-per-click advertising model, we could have saved $100.
Either way, we would-be have lost money, but imagine if we had started
with $5,000 instead of $500. The good feature of pay-per-click is that
you cognize ahead of time how many an visitors you wish receive. If you cognize
your conversion rate and your average sale, you can modify the formula
to determine the most you should pay for a pay-per-click campaign:
Max Pay-per-click = (Conversion rate x Average Sale per purchase)
In our Google example, our maximum pay-per-click should be $0.18. For
every penny we pay less than our maximum pay-per-click, we're production
money! Unfortunately, as of this writing, the minimum pay-per-click
cost for the word "gifts" on Google is $0.37. The ultimate lesson is
that for this particular site, the Google marketing campaign wish not
generate sales revenues. But is that actually true? We could increase our
conversion rate and our average sale per purchase. We could increase
our conversion rate by optimizing the design of the web pages. We could
increase our average sale per purchase by entering affiliate agreements
that offer higher commissions. Let's say we used the $0.37 pay-per-
click model on Google for our gift site. In order to do money we
would have to get our average revenue per visitant to at least $0.38. If
we simply focused on our conversion rate, we would-be need to increase the
percentage of visitors who do a purchase to 4.9%. If we left
conversion rate alone, we would-be need to increase the average sale per
purchase to $16.50. Alternatively, we could try and increase them both.
Not All Ad Models Are Created Equal
Using the same model, let's look at a several type of campaign:
newsletter advertising. This form of advertising involves placing an ad
embedded in a news report that is distributed to a subscriber base via
email. The model for hard average gross margin per visitant is
exactly the same as impression based, except your target market is
different. For example, let us say we spend $1,000 to place an ad in an
email news report simply about buying tips. And let's say the news report
reaches 500,000 subscribers. If we used the same click-through rates
and conversion rates, our average gross margin per visitant would-be be:
Average Gross Margin per Visitant = (.023 x $ 7.7) $1000 / (500,000 x
.0116) = $0.004
We're production
money!! (not much, but the margin is positive).
Translation: this campaign brings us under a half a penny per visitor.
Another helpful magnitude relation is to calculate the return on your advertising
dollar:
Return of Advertising = [(Impressions x Click-through rate x Conversion
rate x Average sale per purchase) Campaign Cost] / Campaign Cost
Or in our case:
Return of Advertising = [(500,000 x .0116 x .023 x $ 7.7) $1000] /
$1000 = 2.7%. Translation: you're production
2.7 cents in gross revenue
for every dollar of advertising you spend. Likewise support in my mind that
this news report reaches a several target audience. Spell folk on
Google may nonchalantly
look for gifts, the recipients of a buying
newsletter may have a higher tendency to buy (i.e. your conversion rate
may be higher). If your conversion rate were higher, let's say 3%, your
new average gross margin per visitant becomes $0.05!! or a 34% return on
our dollar.
The Bottom Line
Using formulas to cypher the success of marketing plans is extremely
helpful and reduces the risk of throwing away precious advertising
dollars. However, understand that each marketing campaign wish take issue
based on cost per click, conversion rates, target audience, and average
sales per purchase. I encourage you to track all the data accessible
about your marketing campaigns so you can realize profits instead of
losses.
Marketing on the web can be difficult. Predicting the behavior of
surfers is an art unto itself. Before you begin defrayment a lot of money
on advertising, experiment with several types of campaigns, track all
of the results, and do futurity marketing decisions based on real
customer behavior. Likewise support in mind that there are other, free forms
of advertising. Writing articles, active in newsgroups, print
advertising, and email marketing are else examples. Remember that all
of these marketing techniques wish have several click-through rates,
conversion rates, and revenues per visitor.
Andy Quick is co-founder of Findmyhosting.com (www.findmyhosting.com),
a free web hosting directory offering businesses and consumers a hassle
free way to find the right hosting plan for their needs. Feel free to
contact Andy at andy@findmyhosting.com in case you have any questions
or comments regarding this article.
Just simply about THE AUTHOR
Andy Quick is co-founder of Findmyhosting.com (www.findmyhosting.com),
a free web hosting directory offering businesses and consumers a hassle
free way to find the right hosting plan for their needs. Feel free to
contact Andy at andy@findmyhosting.com in case you have any questions
or comments regarding this article.
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