When is a Pay per Click Campaign profitable?
By: Christian Azpiroz
Lately, the marketing industry has experienced a fast and increasing growth of Pay Per Click (PPC), the online advertising system that made the traditional ways of promotion on the net an ancient experience. Due to the constant fluctuations that every single market has to go through worldwide, almost without exception, a wide range of companies have decided to abandon their former skepticism in order to bet on an innovative advertising system that keeps them at the forefront of their market segment. In this way, more and more high-quality firms decide to invest a growing portion of their advertising budget on PPC. Other, more doubtful firms are still wondering if this tool is really suitable for them.
Many small companies commit a common mistake when they decide to move to PPC. They believe that this system can, as if by magic, provide immediate revenues. This more and more repeated fallacy leads to an inappropriate handling of the advertising budget. As long as the development of PPC keeps this rate of growth, the field will get even more competitive and muddy. One of the consequences of this tendency is that the profits that could be obtained in a short term will be lower each time.
Different companies should then project a longer vision, despite of the implied risks, and consider PPC as a tool that, in the medium and long term, will adjust to their needs as well as provide revenues. This online advertising system has resulted in tremendously profitable returns for those that have properly administered their inversion on marketing and played with craftiness in the PPC game. Companies that haven’t decided to put money on this kind of advertising program hide behind their doubt with an obvious question: how can you realize if PPC is truly effective?
In any kind of financial investment that a person or company makes, one often knows how much money is available and decides which portion of this amount will be invested, trying always to run the least risk possible. What can’t be set so easily are the revenues that this decision will mean in the near future. The first step when someone has to assess the return of investment is to define accurately what is called conversion. The best way of evaluating the success of an advertising program is to know beforehand if it will represent profitable sales or activities that bring incomes. The follow-up of the campaigns performance is a very important issue to ensure that you will get the highest return of investment.
Not every single PPC program looks at the conversion in the same way. In some cases, conversion means receiving information about the lead for a future contact and potential sale. Sometimes conversion implies a closed sale or a subscription, or any other action that the user completes on the site. In any case, the fact is that the tracking codes have to be properly connected with the purpose of reaching an accurate calculation of the conversions and the associated costs. Sometimes, the tracking codes are not so useful. An example of this situation is the case of a Website that desires to get phone calls from the leads in order to sell the products by phone. In this situation it is better to perform a manual calculation of conversions.
Once it is decided which kind of response is expected from the campaign, you should analyze which is the better cost per conversion. Most small companies make the common mistake of asking if the cost should be equal or lower than the ideal profit. This type of reasoning usually brings more complications than advantages. That’s why the best way of calculating this cost is by doing it based on the customer life cycle.
In order to operate correctly with this parameter it’s necessary to know the average benefit in the long term per each client. For example, imagine a company that sells subscriptions through a dating Website and charges $30 monthly. It is essential to establish approximately how long a client will continue paying for these subscriptions. If the customer purchases an average of 4.5 times, the amount that this person will represent for the company is $135. The company in that situation can spend up to $135 per conversion. In this equation could be included the associated cost of the financing of these 4.5 months.
Another important point when determining an optimum cost is to compare the number of leads with the cost per conversion. The more leads you desire to get, the marginal cost for each one will be increasing. At a certain point, an extra conversion will imply that you’re losing money.
Some collateral issues that are not always considered are the mouth-to-mouth promotion, as well as the chance of someone that has seen the ad but types the URL without clicking on it, which makes difficult an adequate tracking.
For certain, deciding the cost per lead based on the client life cycle is the best way of calculating the potential profitability of a PPC campaign. Nevertheless, as in every decision of this kind, the success of each decision will depend on having in advance the most accurate information.
Lately, the marketing industry has experienced a fast and increasing growth of Pay Per Click (PPC), the online advertising system that made the traditional ways of promotion on the net an ancient experience. Due to the constant fluctuations that every single market has to go through worldwide, almost without exception, a wide range of companies have decided to abandon their former skepticism in order to bet on an innovative advertising system that keeps them at the forefront of their market segment. In this way, more and more high-quality firms decide to invest a growing portion of their advertising budget on PPC. Other, more doubtful firms are still wondering if this tool is really suitable for them.
Many small companies commit a common mistake when they decide to move to PPC. They believe that this system can, as if by magic, provide immediate revenues. This more and more repeated fallacy leads to an inappropriate handling of the advertising budget. As long as the development of PPC keeps this rate of growth, the field will get even more competitive and muddy. One of the consequences of this tendency is that the profits that could be obtained in a short term will be lower each time.
Different companies should then project a longer vision, despite of the implied risks, and consider PPC as a tool that, in the medium and long term, will adjust to their needs as well as provide revenues. This online advertising system has resulted in tremendously profitable returns for those that have properly administered their inversion on marketing and played with craftiness in the PPC game. Companies that haven’t decided to put money on this kind of advertising program hide behind their doubt with an obvious question: how can you realize if PPC is truly effective?
In any kind of financial investment that a person or company makes, one often knows how much money is available and decides which portion of this amount will be invested, trying always to run the least risk possible. What can’t be set so easily are the revenues that this decision will mean in the near future. The first step when someone has to assess the return of investment is to define accurately what is called conversion. The best way of evaluating the success of an advertising program is to know beforehand if it will represent profitable sales or activities that bring incomes. The follow-up of the campaigns performance is a very important issue to ensure that you will get the highest return of investment.
Not every single PPC program looks at the conversion in the same way. In some cases, conversion means receiving information about the lead for a future contact and potential sale. Sometimes conversion implies a closed sale or a subscription, or any other action that the user completes on the site. In any case, the fact is that the tracking codes have to be properly connected with the purpose of reaching an accurate calculation of the conversions and the associated costs. Sometimes, the tracking codes are not so useful. An example of this situation is the case of a Website that desires to get phone calls from the leads in order to sell the products by phone. In this situation it is better to perform a manual calculation of conversions.
Once it is decided which kind of response is expected from the campaign, you should analyze which is the better cost per conversion. Most small companies make the common mistake of asking if the cost should be equal or lower than the ideal profit. This type of reasoning usually brings more complications than advantages. That’s why the best way of calculating this cost is by doing it based on the customer life cycle.
In order to operate correctly with this parameter it’s necessary to know the average benefit in the long term per each client. For example, imagine a company that sells subscriptions through a dating Website and charges $30 monthly. It is essential to establish approximately how long a client will continue paying for these subscriptions. If the customer purchases an average of 4.5 times, the amount that this person will represent for the company is $135. The company in that situation can spend up to $135 per conversion. In this equation could be included the associated cost of the financing of these 4.5 months.
Another important point when determining an optimum cost is to compare the number of leads with the cost per conversion. The more leads you desire to get, the marginal cost for each one will be increasing. At a certain point, an extra conversion will imply that you’re losing money.
Some collateral issues that are not always considered are the mouth-to-mouth promotion, as well as the chance of someone that has seen the ad but types the URL without clicking on it, which makes difficult an adequate tracking.
For certain, deciding the cost per lead based on the client life cycle is the best way of calculating the potential profitability of a PPC campaign. Nevertheless, as in every decision of this kind, the success of each decision will depend on having in advance the most accurate information.
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