While the last few posts focused more on production, this post is dedicated to marketers and business owners who would be accountable for ad budget, ad spend and profit margins to keep your business sustainable.
Some of the metrics that we’ll discuss include Click Through Rate, Cost Per Acquisition, Cost per Lead, and Conversion Rate.
Cost Per Acquisition
Cost Per Acquisition is essentially the cost incurred per sale. It is taken into account when a transaction occurs between the seller and the buyer. The cost includes the budget you spend for driving traffic to site, and eventually converting that traffic into a sale.
Cost Per Lead
Cost Per Lead is the cost of acquiring a contact, for example an email address of a potential customer.
No. of Impressions
No. of Impressions is the number of times your ads is being shown by the ad network. For example, if you are running a display ad campaign with Google Display Network (GDN), and your ad banner is displayed a million times, across multiple devices to a set of web browsers, it also known as impression count.
Click-through rate (CTR)
Click-through Rate which is CTR for short, is the number of clicks you get to your site divided by the number of impressions. CTR is also the term use to find out the number of people who click a ‘call-to-action’ to your site via email, search or display ads.
Open Rate is the term used to describe the number of people who opens your email, divided by the number of email sent out.
Conversion rate is the term used to reflect the number of people who make a purchase on your website.
Cost per click (CPC)
Cost per Click also known as CPC, is the cost incurred for a person clicking on an ad banner or search ad to reach a website.
A Case Study on Ad Spend
Now that we’ve demystify the terminologies, let’s take a look at an example.
Let’s imagine that you are running a blogshop that is selling desktop plants (because a lil bit of greens bring some sunshine to your workflow). With a budget of $500, you decide to run a paid ad campaign with Google Display and Search Network.
Photo credit here.
If you do a simple search on Google with keywords ‘desktop plants’, you’ll get a few links such as http://www.popsugar.com/smart-living/Cute-Office-Plants-29209894#photo-29209894 and https://www.etsy.com/market/desk_plant. These search results indicates that you’re not the first to be selling such goods, and chances are there is a niche market for it, which is a good sign.
Running a paid ad campaign with keywords such as ‘office decor’ or ‘plants for desk’ would be a good start. If you are unsure of the types of keywords to use for your search campaign, tools such as http://keywordtool.io/ will come in handy. Using the right keywords can make or break an online business, we’ll reserve this topic for another post.
For today, let’s focus on a few calculations.
With your budget of $500 for a display ad campaign, soon after running the ads, you get 1000 people clicking through to your website. This indicate that the cost per click (CPC) for the campaign is $0.50 ($500 / 1000).
From your analytics dashboard, you also found out that your ad was displayed 25,000 times. This indicates that your CTR is 4% (1000 / 25,000 *100).
Out of the 1000 people who click through to your website, 10 make a purchase on site, which indicates that your Conversion Rate is 1%.
Based on the above results, what is your CPA?
Your Cost Per Acquisition is $50 ($500 ad spend / 10 sales).
Based on the above results, what is your CPL?
Supposedly, out of those 1000 people who clicked through your website, 35 sign-up for your newsletter (including the 10 that made a purchase). This indicates that your newsletter sign-up rate is 3.5%. Your Cost Per Lead in this case equates to $14.30. In other words, it cost you around $14 to acquire an email address.
You might think that it seem expensive just to get an email lead at that cost, but those 35 emails you have are potential customers for first purchase and repeat purchases. Do the math, and see if it makes sense for potential earnings.
Photo credit here.
If you are retailing your handmade plant desk at $95 each, this ad investment made sense, as it is lower than your retail price. If your CPA is more than your retail price, it is probably not a worthy investment.
Bear in mind that your online ad cost does not reflect your total marketing cost, which can include web-hosting fees, man-hours and offline marketing fees. Be sure to include all other cost to find out if your marketing effort translates into a healthy profit.
Hope this post will help you better navigate the finances and ad spend for your business. It might seem daunting at the start, but with some simple analytics platform, you’ll soon get the hang of what works for your online business, and what doesn’t.
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