Article on Do you have Money to Burn? by Rise Marketing UK
Article on Do you have Money to Burn? by Rise Marketing UK

Do you have Money to Burn?

Introduction

It never ceases to amaze us how many Google AdWords customers start spending money without calculating the Return On Investment (ROI) they expect.

In this article, we'll discuss the importance of establishing clear conversion metrics for your online business, together with some real-life examples to help you get started on the road to profitable Google AdWords.

Initial PPC conversion metrics

Before you even think about creating your first AdWords campaign, sit down and work out your initial Pay-Per-Click (PPC) conversion metric. Here's a sample template for a product or service that retails at £30.00.

Impressions CTR Visits Rate Sales Revenue Profit GPM
1000 1% 100 2% 2 £60.00 £10.00 16.6%
Max CPC   £0.50          
Total Cost   £50.00   £25.00      

The Click-Through-Rate (CTR) of your ads will become a factor over time. Increasing your CTR though optimisation will improve your Quality Score, reducing the average Cost-Per-Click (CPC) paid for each visit. However, your initial metric should employ the maximum CPC you're prepared to pay.

Unless you have data to justify a higher figure, assume a conversion rate of between 1% and 2%. Using these assumptions yields a Gross Profit of £10.00 per 100 paid-search visitors, and a Gross Profit Margin (GPM) of 16.6%.

Incremental cost reduction

If you're new to online marketing, these margins may appear slim, however, the upside becomes apparent when you consider even a small change in either the cost of acquisition or conversion rate.

Below is the same metric, but with an Average CPC of £0.30p rather than the maximum of £0.50p.

Impressions CTR Visits Rate Sales Revenue Profit GPM
1000 1% 100 2% 2 £60.00 £30.00 50.0%
Avg CPC   £0.30          
Total Cost   £30.00   £15.00      

Combining a reduced CPC with a 1% gain in your conversion rate yields a GPM of over 66%.

Impressions CTR Visits Rate Sales Revenue Profit GPM
1000 1% 100 3% 3 £90.00 £60.00 66.6%
Avg CPC   £0.30          
Total Cost   £30.00   £10.00      

A real life example

The value of a conversion metric becomes clear when you create a new ad group, and Google offers you the "Estimated First Page" bid. This example is taken from an Google AdWords Tune-up we did on the campaigns of a leading UK software house.

They'd adopted Google's recommended Maximum CPC bid of £2.82, yielding 930 visitors per month at an average CPC of £0.44p.

Impressions CTR Visits Rate Sales Revenue Profit GPM
1000 1% 930 3% 28 £976.50 £567.30 58.1%
Avg CPC   £0.44          
Total Cost   £409.00   £14.67      

While their campaign was profitable, overriding Google's recommended Max CPC with our own (£0.50p) yielded the following result:

Impressions CTR Visits Rate Sales Revenue Profit GPM
1000 1% 840 3% 25 £882.00 £747.60 84.7%
Avg CPC   £0.16          
Total Cost   £134.40   £5.33      

Note that dramatically reducing the max CPC bid from £2.82 to £0.50p did not result in a comparable fall in traffic (thanks to better keyword segmentation), and produced more revenue from fewer visitors thanks to a significantly improved GPM.

Build your own metrics with our free spreadsheet...

Having a conversion metric for each type of campaign (PPC, CPM, etc.) and product line you offer is fundamental to achieving your advertising goals on Google. Armed with these, you'll always know what you can afford to bid, and the conversion rate your site needs to deliver.

We've taken a few common metrics and put them into a Microsoft Excel spreadsheet for you to download and use with you own campaigns (right-click and select Save Link As...).

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Tags for this article

Google AdWords, ROI, PPC, Conversions, CTR, Quality Score, Gross Profit

About the author

Peter Astley-Sparke is the director of Rise Marketing. Follow us on Twitter. Visit Peter's Google+ Profile.