Title: "How Much Should You Pay for a Click?" Copyright © 2002 Author: Andy Quick Contact Author: mailto:andy@findmyhosting.com Website: http:// http://www.findmyhosting.com/web- resources/Articles/howmuch.htm Publishing Guidelines: You have permission to publish this article electronically or in print, free of charge, as long as
resource box at bottom is included. No notification required.How Much Should You Pay for a Click? Andy Quick
You have a web site ready 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 web entrepreneurs have learned that magic nut to crack is attraction: get a steady flow of customers who explore your site and eventually purchase goods. The overhead costs of most web businesses are minimal relative to brick and mortar stores. However, variable marketing costs can over shadow sales revenues by orders of magnitudes. Unfortunately, unlike saying in movie Field of Dreams, "If you build it, they will not come!" Luckily, industry has learned this lesson; some hard way, and others in spite of losers. Dot-coms are clearly not darlings of 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 make money at same time, you should consider a science-driven approach. What does that mean? Read 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 other online retailers. People go to our site, pick a link to a jewelry store for example, buy something, and in turn we receive a commission from sale. The process of creating site, signing up 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 incredibly smart marketing idea: pay to have our site come up in an ad box on a major search engine (Google) every time someone searched on word "gifts". The word gifts is searched for 49,000 times per day! We figured we would have a good flow of visitors and money would start rolling in. For certain, we would at least break even. We sunk $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 people actually clicked on our ad when they saw it (click-throughs) - 429 Number of times a person visiting our site 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 learned a lesson quickly at a relatively low cost. Let's look at this event from a slightly different perspective, putting costs in terms of number of visitors:
Our investment in Google - $ 500 Number of times our ad was displayed (impressions) - 36,964 Number of times people actually clicked on our ad when they saw it (click-throughs) - 429 Ad cost per visitor - $ 1.17 Number of times a person visiting our site made a purchase - 10 Average sale per purchase - $ 7.70 Average revenue per visitor - $ 0.18 Average gross profit per visitor - $ (0.99)
We were basically giving $1 away for each visitor that came to site. Not a winning business model. However, taking this information, we can assess which marketing techniques can work best for 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 people actually clicked on our ad when they saw it (click-throughs) - 429 Percentage people who clicked on our ad (click-through rate)- % 1.16 Ad cost per visitor - $ 1.17 Number of times a person visiting our site made a purchase - 10 Percentage of visitors who purchased something (conversion rate)-% 2.3 Average sale per purchase- $ 7.70 Average revenue per visitor- $ 0.18 Average gross profit per visitor- $ (0.99)
Running Numbers
Putting this all together, you can create a formula for estimating gross margin per visitor for a specific marketing campaign:
Average Gross Margin per Visitor = Average revenue per visitor - Advertising Cost per Visitor Advertising Cost per Visitor = Campaign Costs /(Impressions x Click- through rate)
Average revenue per visitor = Conversion rate x Average sale per purchase
Putting it together:
Average Gross Margin per Visitor = (Conversion rate x Average sale per purchase) – (Campaign Costs / Impressions x Click-through rate)
Using our Google example, average gross margin per visitor would be calculated as:
Average Gross Margin per Visitor = (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 type of campaign, all of above variables can change. When 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, just because our ad was displayed inside someone's browser did not mean they would click on ad itself.
Enter pay-per-click advertising. This advertising model allows you to pay for an ad only when a person actually clicks on it. In this model, you are guaranteed to get visitors. However, cost per click is usually much higher. Let us assume we ran our same Google campaign except we used pay-per-click advertising. Pay-per-click also factors in position which will drive amount you pay per click (the higher ad position on screen, higher price per click will be). Let's say we pay google $0.50 per click and based on Google's traffic for word gifts, we receive 170 clicks per day (or visitors), or in total 1000 visitors over life of campaign (we still only put in $500, so $500/$0.50 = 1000). Using our same ratios, let us re-compute our Average Gross Margin per Visitor, modifying our formula slightly (notice formula is simpler):
