Calculating the Profitability of a Web Marketing Campaign
I recently posted a rather lengthy reply to a web marketing group on LinkedIn and got to thinking, “Why not put it on the blog?” This is pretty valuable information. Hopefully some of you will be able to benefit from it.
Get Your Metrics in Place:
Before doing any paid advertising, you need to make sure Google Analytics or some other metrics package is in place to help measure traffic and conversions. This is critical to establish a baseline and to help gauge future successes. If you don’t have any metrics in place, you have no business spending money on advertising, or else you’ll be wasting a whole lotta’ dough. It is absolutely essential to have metrics in place before doing any kind of web marketing.
For an E-commerce site, the most critical factors are conversion rates and the average order value(AOV). Assuming metrics are in place and the client is tracking conversions and revenue properly, you can make a fairly accurate assumption about how a campaign will perform. For example, if you get 10k visitors to your website, you have a 1% conversion rate, and an average order of $150, you will sell about $15k worth of product. Sweet!
10k visitors x .01 = 100, x $150 = $15k. So far so good, right?
Now what if you spent $1 per click to get those 10k visitors? It would cost you $10k to generate $15k worth of sales. Although this may sound profitable on the surface, by the time you factor in the cost of goods(~40-50%) and service costs associated with managing the campaign, you would likely be taking a beating on such a campaign. Continuing along this path is a sure way to the poorhouse. With this in mind, you need to pay very close attention to:
A.) Conversion Rates
B.) Average Order Value
C.) Cost of Goods
D.) Cost of Services
E.) Cost Per Click
Once you get a handle on the above, you can put together a proforma(educated guess) that illustrates how you think the campaign will perform for your business. It’s easier than it sounds.
For leads-based campaigns, it’s much more tricky to illustrate profitability. There are some free tools available such as the “Google Keyword Tool” that will give you an idea of the volume and cost associated with a paid search campaign. For leads-based campaigns, however, people are typically tracking form submissions and phone calls as “conversions”, but these are just leads and not actual sales. With this in mind, your initial metric is likely to be a cost per lead and you want to be concerned with getting your cost per lead down lower and lower over time to illustrate improved campaign performance. For a starting point, ask your customer what they feel is a reasonable cost per lead. Depending on the business, $20 may be reasonable or $500 may be reasonable.
Now once you have that shiny-new lead, how many of these folks convert into actual customers is the biggest question. Some people are very diligent about asking “How did you hear about us?” and they track those leads using a CRM tool such as Salesforce, in which case, 6 months or so from now, when that sale actually closes, you can say “Yes, this $10k sale came from Google Adwords”. In my experience however, most people are not very diligent about tracking the source of leads, let alone where the customer actually came from once the deal closes months from now. This is an ongoing problem with many leads-based companies. In other words, most leads-based companies don’t really know what their cost per customer is or how profitable they really are.
Just to complicate matters even more, we haven’t even touched on attribution and the multiple touch-points that may be involved in a sale. For example, what if you have a television ad promoting the handy-dandy Pocket Fisherman. Two weeks later, someone who has seen your ad on TV searches Google for “Pocket Fisherman”. They see your Google Adwords ad at the top of the page and the click on the link. Which campaign gets credit for the sale, Google Adwords or the TV campaign(Original source vs. most recent source)? This can get even more complicated when multiple touch points are involved. In some cases, a person may first hear about you on the radio, then do an Internet search, then subscribe to your Email list, then type your brand name back into Google and click on a paid search ad, which finally sealed the deal. I’m reeling just thinking about it.
Calculating the profitability of a web marketing campaign can be extremely complicated, however, the metrics and concepts above are a good starting point and will get you headed in the right direction. If have any questions or need help understanding the profitability of your own web marketing campaigns, drop me a line. We’d love to help you.