Continued from page 1
Average Gross Margin per Visitor = (Conversion rate x Average sale per purchase) – (Campaign Costs / Visitors)
Plugging in 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 have lost money, but imagine if we had started with $5,000 instead of $500. The nice feature of pay-per-click is that you know ahead of time how many visitors you will receive. If you know your conversion rate and your average sale, you can modify formula to determine 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 making money! Unfortunately, as of this writing, minimum pay-per-click cost for word "gifts" on Google is $0.37. The ultimate lesson is that for this particular site, Google marketing campaign will not generate sales revenues. But is that really true? We could increase our conversion rate and our average sale per purchase. We could increase our conversion rate by optimizing design of web pages. We could increase our average sale per purchase by entering affiliate agreements that offer higher commissions. Let's say we used $0.37 pay-per- click model on Google for our gift site. In order to make money we would have to get our average revenue per visitor to at least $0.38. If we just focused on our conversion rate, we would need to increase percentage of visitors who make a purchase to 4.9%. If we left conversion rate alone, we would need to increase average sale per purchase to $16.50. Alternatively, we could try and increase them both.
Not All Ad Models Are Created Equal
Using same model, let's look at a different type of campaign: newsletter advertising. This form of advertising involves placing an ad embedded in a newsletter that is distributed to a subscriber base via email. The model for calculating average gross margin per visitor is exactly 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 newsletter about shopping tips. And let's say newsletter reaches 500,000 subscribers. If we used same click-through rates and conversion rates, our average gross margin per visitor would be:
Average Gross Margin per Visitor = (.023 x $ 7.7) – $1000 / (500,000 x .0116) = $0.004
We're making money!! (not much, but margin is positive). Translation: this campaign brings us under a half a penny per visitor. Another helpful ratio is to calculate 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 making 2.7 cents in gross revenue for every dollar of advertising you spend. Also keep in my mind that this newsletter reaches a different target audience. While people on Google may casually look for gifts, recipients of a shopping 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 visitor becomes $0.05!! or a 34% return on our dollar.
The Bottom Line
Using formulas to compute success of marketing plans is extremely helpful and reduces risk of throwing away precious advertising dollars. However, understand that each marketing campaign will differ based on cost per click, conversion rates, target audience, and average sales per purchase. I encourage you to track all data available about your marketing campaigns so you can realize profits instead of losses.
Marketing on web can be difficult. Predicting behavior of surfers is an art unto itself. Before you begin spending a lot of money on advertising, experiment with different types of campaigns, track all of results, and make future marketing decisions based on real customer behavior. Also keep in mind that there are other, free forms of advertising. Writing articles, participating in newsgroups, print advertising, and email marketing are other examples. Remember that all of these marketing techniques will have different 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 right hosting plan for their needs. Feel free to contact Andy at firstname.lastname@example.org in case you have any questions or comments regarding this article.
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 email@example.com in case you have any questions or comments regarding this article.