Getting Back to the Basics: Knowing Your Formulas and What They Mean
Mar 5th, 2008 by msdanielle
My specialization is in direct response PPC and flat-rate advertising. This means that I must set up an ad campaign that targets the correct user based on keywords and ad copy, or ad copy and audience, send the user to the correct landing page, and convert the user at the lowest cost-per-action (CPA) possible. So where does one start?
First, you must determine what your goals are for conversion. E-commerce sites may have a goal of sales in mind, a newsletter campaign may target sign-ups and try to “sell” the user with newsletter ads, an email submit campaign may want the user to fill out a short form, and so on. Determine your main desired action and make sure you’re able to track your earnings per campaign.
As I’ve mentioned before, it’s very important to know your numbers. There are key variables in your basic equations that will help you determine your baseline numbers — baselines such as your maximum cost-per-click (CPC), maximum CPA spend, and minimum conversion rate (CR). Knowing these three variables for any given month or quarter will really help guide you as to where to take your campaign.
*Basic Formulas*
Cost Per Click (CPC): Total cost / Total clicks
Let’s say for one month you spend $400 and get 1285 clicks. Your average CPC is $400/1285 = $0.31.
Conversion Rate (CR): Total conversions / Total clicks
If in one week you are able to convert 48 visitors into newsletter subscribers from 137 clicks, your CR is 48/137= 0.3504 or 35.04%. But keep in mind that for newsletter sales you must determine the CR for sales (total sales conversions / total sign-ups). Newsletter sales CR will be much lower than the sign-up conversion rate since it requires a purchase.
If you’re running an e-commerce, you’ll need to track total clicks and total sales conversions. Very important for e-commerce: make sure you’re driving the user to the most qualified landing page.
For affiliate PPC campaigns, if you’re not driving the user to your own site, or the conversion page is hosted elsewhere, you’ll need to make sure your affiliate manager has included your tracking pixel into the conversion page so you can track actual conversions. Contact your rep to see if they will accommodate this request.
One thing to keep in mind about CR is that it is a rate, and that you should over time know the average. This may help when estimating whether or not a campaign based on a flat-rate price will work.
Cost Per Action (CPA): CPC / CR or Total cost / Total conversions
Your CPA tells you what you’re spending per individual conversion. Raising your CR or lowering your average CPC will help lower your CPA. It’s all about balance…
Visitor Value: Total clicks / Total revenue
This is a number that you should not be overlooking. Determine what the average value is of each visitor, and you will know better what maximum you can spend per conversion.
Return on Ad Spend (ROAS): Total revenue / Total cost
This is pretty self-explanatory. However, find the balance where you are earning the highest profit. An ROAS of 10 is great, but in many cases it might mean you can spend more, as long as your other metrics are in check. For instance, wouldn’t you rather boast an ROAS of 7 if it means 20% more profit?
Conclusion
There are principles behind every metric — these aren’t just calculations that produce numbers you have to live with. You can influence each one. PPC is managed by crunching numbers, looking at the data, and making appropriate changes. Striking the balance between all the metrics and finding where you earn the highest profit is difficult but can be done with proper tracking. Understanding the principles of the formulas will help you shave down the excess fat and get the most out of your advertising dollars.
[Note: I'll try to get an advanced formulas article out to you guys. For now, check out the article on flat-rate text ad buys for examples.]
[If you enjoy reading MsDanielle.com, please feel free to subscribe via RSS or get free email updates.]
Follow me on Twitter
Subscribe via email:
nice nice! it is always good to know the basics it build your foundation – a person just getting into marketing should know what these simple terms mean because it will help them later on
hey ian, let me know if u have any questions
This reminds me of managerial accounting in college. Different variables, but the formulas are the same. Great writeup!
thanks, hope you found it useful
Instead of ROAS I like to use ROI (Return On Investment). Same difference. My equation looks like this.
(gross – cost) / cost
And for the newbies multiply that by 100 if you need to. 100% means I spent a dollar and I grossed $2. So my profit is the same as what I spent. Just another equation from the Math Teacher.
hey browie! thanks for the example
Add more terms…
Would you?
You’re definately the best looking maths teacher I’ve seen
Looking forward to the more advanced stuff.
Maths is the only thing i dislike about CPC campaigns. But it has to be done if you want to succeed.
Speedlinking – Back To The Basics…
With a work schedule that has been consuming more of my time lately and a PC that began to make very peculiar sounds tonight, I thought it would be a good chance to have a Speedlinking Edition that gets back to the basics.
1. Michael Kwan kicks things…
I thought I had left maths and accounts way behind. But your calculations make me remember all of that which I hate to remember.
Well explained though………
This is something I always over look. When I set up my first page it had no goals, no numbers and has suffered because of this. I am not going to quit on this site but am considering starting up a second (well thought out) site to compare the outcomes.