Increase Internet ROI: Why and How to Measure and Improve Pay Per Click ROI

By: Brian Carter

I just read the disturbing results of a joint study on the performance of search marketing firms. Jupiter Research and iProspect surveyed 636 qualified search marketers and 224 search agencies, and found that:

- Most internet marketing firms look at metrics like web site traffic or search engine rankings, rather than business results such as ROI (return on investment) or total sales generated from search engine leads.
- Fewer than 40% of search engine marketers are evaluated on ROI or total sales.
- Only 1 out of 7 search marketers measure overall ROI of combined SEO (search engine optimization) and PPC (pay per click) campaigns.
- Most marketers cannot separate the individual ROI of the two different channels - 45% said they cannot determine whether SEO or PPC provides a higher ROI.

Is there a philosophy behind your business’s approach to pay per click (PPC)? The picture painted by my consultant peers is that most companies think you just choose a bunch of keywords, set a monthly budget, and then pay it. Fine-tuning for higher profits hasn’t occurred to them.

For other companies, there may be some thought behind it. Some believe that expansion, higher revenues, and customer acquisition outweigh nearly any cost. But the last 6 years of hard knocks entrepreneurship have drilled some different business basics into my soul.

I believe every advertising campaign should break even or profit on its own merit. This conviction grew while I was investing my own money in my business efforts. Now I work for someone else ( as an internet marketer, and one of our major revenue sources is pay per click. I understand their money isn’t limitless, and I treat it as if it’s my own- I don’t take ad spending lightly.

Thus, my modus operandi is to treat each keyword individually. It either converts for us at a rate and for a price which is sustainable and profitable, or it’s a loser, and I delete it. I generally give a keyword 100 clicks before cutting it loose. That 1% conversion rate is my cut-off point.

With Google adwords, it’s been easy (Overture has been unable to get us conversion numbers or explain what the problem is, so we’re going to have to write our own code to track it). The conversion rate and cost per conversion are calculated for you, so I compare those numbers to the profit margin on the items that correlate to each keyword. Oh, by the way, Adwords’ “Budget Optimizer”, by their own admission, isn’t recommended if you’re “focused on measuring conversions or values of ad clicks.” Ummm, yeah, give me some of the unvaluable ones that don’t convert, please… duh!

Let me break that down for you… to increase your internet ROI, you must understand the business basics of profit margin, conversion rate, and break-even point. Many articles have been written on these topics, so here’s a summary: For each item, subtract the cost from the price, and you have profit margin. Conversion rate is the percentage of click-throughs who actually buy from you. The break-even point for any item is the profit margin multiplied by the conversion rate.

If you profit $10 on a $30 item, and 5% of your click-throughs convert, then you can’t pay more than $0.50 per click. You see, 5% is 1 out of every 20 people, and if it takes 20 people to make a sale, that’s going to cost you $10 at $0.50 per click, and that’s your break-even point. If you do better than break even, you’re making a profit.

You can do more advanced things if your website coding allows you to query which items and/or total sale amounts associated with particular keywords. For example, I’ve found a certain word that’s in a number of our keyword phrases, and for some reason, buyers who like that word tend to buy more than one item and have a higher total sale. I can use that to calculate my break-even point instead of just the one item.

And when you have months and months of historical data to query, you can find out how often different customer groups return and buy more, and thus what the lifetime value of a customer is. Then you can bid for clicks to get customers, rather than just to sell an item once.

But I’d caution you to go gung-ho basing your maximum bids on lifetime customer value before you have this kind of data. You must be sure that your site fosters multiple lifetime purchases, and know which keywords bring in the repeat customers. Otherwise, you’re shooting a shotgun in the dark… and you might get hit by a richochet.

Why is it so important to increase your ROI on your PPC bids? It’s not just so that you can increase profits, although that’s one of your goals. It’s also because, ultimately, the most efficient business will be able to bid the highest amount for each keyword and still break even or profit. And it’s not just about being #1 – there are only so many visible PPC spots. If you’re sloppy about it and waste money, you’ll get pushed out of the visible competition. There are a finite number of valuable, converting keywords for each product, so if you want to sell your product on the internet, you must measure and improve your PPC ROI.

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Since 1999, San Diego SEO Consultant Brian B. Carter, MS, has reached more than 2 million readers online. Brian's second book, "How I Made $78,024.44 in Six Months Using the Newest Secrets of AdSense and Overlooked Keywords" will be available in October, 2005 from his website, Ranking High on Search Engines

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