I often get asked the question, is it worth advertising Online? Generally small businesses and individuals are referring to Google Adwords , Bing Ads or Yahoo Search Marketing and specifically to the text adverts that appear in the Search Results Pages (SERPs).
There is no simple yes/no answer as to whether someone should advertise using the Search Engines. The potential benefits all relate down to a few simple calculations.
Assuming that the goal of your landing Page (the Webpage you choose people to land on when they click the advert) is for visitors to buy something then we need to know the following; how many visitors to the Webpage does it take for there to be a sale? This is called the conversion rate. A good landing Page gets about a 1% conversion rate i.e. it takes 100 visitors to get a single sale.
Customer lifetime value
Now it’s needed to calculate how much a customer is worth to you (life-time value (LTV) of the customer). The lifetime value of a customer can be difficult to calculate but it’s important not to overstate the value; the aim is to use advertising to make money so you shouldn’t be spending more on advertising than you make from it (of course we should really take cash flow into consideration here). The LTV is the average profit or loss from a single customer. LTV is relatively simple to calculate for once-off purchases but for repeat customers and subscription products it’s more difficult.
What is the maximum Cost to Acquire a Customer (CAC)
As we know what the life-time value of a customer is, we can estimate how much we can spend to get a new customer (i.e. what our cost to acquire a customer (CAC) can be).
Using a very simple example, suppose that the average customer buys twice from you and the total profit is $100 over the two purchases. You could then spend $100 to gain a new customer – your CAC could be $100 (yes, I know this is very simplistic but you get the point 🙂 ).
How to Calculate the Costs Per Click (CPC)
So, how much should you spend on Online advertising? CPC is how much you can afford to spend each time someone clicks on our advert (Google, Bing and other ad networks allow you to specify a maximum amount you want to spend on each click).
We know, as described above, what our conversion rates should be (about 1%) and how much we could spend on a new customer acquisition through the CAC calculation therefore our calculation is as simple as:
CAC x Conversion Rate = Cost Per Click
Using an example:
Maximum CAC = $150
Conversion rate = 1%
$150 x 1% = $1.50 (we can afford to spend $1.50 per click).
There are many other things that can be done to improve our conversion rates (such as better landing Page design) as well as other things. Contact me to discuss how you can grow your business through Online advertising.