You’d think that ROI success would be easy to measure, but advertising has never been a so simple to figure out.
When the talk turns to CTR, CPM, CPA, CPS many online business owners’ eyes glaze over or they throw up their hands in confusion.
So today I’m going to break down the mechanics of what these terms mean and how they work. It’s easier then you might think to wrap your head around it all.
Click Through Rate (CTR). This is a standard measure of how effective a particular ad really is.
CTRs range from the ecommerce industry average from about 0.20% to as high as 5% or 10%. As a general rule though, the more targeted the site, the higher the CTR your ad will return.
For example, one would expect an ad for Tiger Woods Golf Club to get a higher CTR on a golf related web site than on a site whose theme was sports in general. On a general site such as The Wall Street Journal Online, they would get an even lower CTR.
Cost Per Sale. A much more relevant number to pay attention too is the actual cost of making the sale of a golf club. And at the end of the day, you don’t care how high the CTR is if those clicks don’t result in a higher proportionate number of sales.
CPM Banner Economics – Direct marketers look at any advertising method at the end of the day in terms of how many sales their ads produce immediately.
Here’s an example of what I mean. Let’s look at how your numbers might look if you were using banner ads.
Naturally, your results will vary, depending upon where you advertise and the effectiveness of your creative. Here are some arbitrary numbers to use in our calculation:
CPM = $2 (a not untypical rate for general, not-very-targeted websites)
CTR = 0.20%
Conversion Rate = 2% (from your landing page)
Cost per Visitor = CPM / (1000 x CTR) = $2.00 / (1000 x .002) = $1
So, in our example, the $2 you spent to show the banner ad to 1000 people netted you 0.2% or 2 visitors to your site.
Each visitor cost you $1 to get there. Ok. Now let’s calculate what your advertising cost really is per sale.
At a 2% conversion rate from you landing page, you would need 50 visitors to see your and come to y our site in order to make one sale.
Here’s the formula in a nutshell:
- Cost per Sale = Cost per Visitor / Conversion Rate = $1.00 / .02 = $50
- So in this example, it is going to cost you $50 to get one sale? Yikes!
But don’t freak out just yet… let’s look the bigger picture.
What if your site had 10% conversion rate instead of just a 2%? Now it would only cost you $10 to get a sale.
Where most ecommerce merchants selling online fail to take into consideration is how having a back-end product, or doing an upsell at the time of purchase can affect these numbers.
For example, what if it cost you $50 to get a $50 sale? Wouldn’t be worth the trouble right? That depends….
What if you had a back end product that you could offer these buyers and you knew that 30% of your first time buyers bought your back end product?
Let’s look at the numbers:
You spend $50.00 to make $50.00 so it’s a wash. But now wait a minute… 30% of 1000 (using the example above) means that you now have 300 people taking you up on your back end product!
And it cost you NOTHING to sell this back end product because the customer acquisition cost was already off set by their purchase of the first product.
Pretty sweet eh?
Regardless of what your back end product costs, you are automatically in the black – because it cost you zero dollars in advertising to generate that sale.
Looking at it this way, you could even go underwater on the front end purchase and still make money. The key to making this work is to know and understand your conversion numbers first.