Advertising dollars are easily spent online, but you can easily keep track on profitability with simple formula. A few numbers which you must think about
First you need to know two things – the unique value of one visit to your site and your profit margin. How to get these number?
To calculate your unique value of one visit to your site, you need your conversion rate and how much each conversion is worth on average. You can easily find your conversion rate in AdWords. If you don’t see the conversion rate column you can find it by clicking on Columns, then Modify Columns and selecting Conversion Rate from the Conversions list.
A conversion can mean different things depending on your marketing objective. An ecommerce would have an online purchase as a conversion. A service business might be collecting prospects contact details or leads. Conversion rate is the percentage of people who clicked on an ad and completed a meaningful action on your website.
Then to find out how much each conversion is worth on average you must consider the Customer Lifetime Value (CLV). Depending on your business this number can vary a lot. For example, for an ecommerce a customer might shop regularly from this website. A service company might provide a service only once for a lifetime – like a degree or wedding photo session.
Even if your customer found your website once, they might click on multiple ads in their lifetime and in the same time spend money on your product. Therefore, you must always consider reoccurring marketing costs for having this customer. If you don’t have that data, you can just take the average order value (AOV).
For service companies, you can take the cost a single customer pays and average it out between all the prospects you have collected. In case of a B2B company you can just take the final sale cost. If there is a subscription you can multiply the fee by the average contract length.
Unique Value Per Web Visit
Once you agree on your conversion value, just multiply this by the conversion rate and you will get the worth of a single web visit. For example, $100 X 5% conversion rate = $5. However, this is not the maximum cost per click you should pay. This calculation does not take into consideration your production costs.
To get this in the calculation, you must have your profit margin. The formula for a profit margin is usually (revenue- cost of goods sold)/revenue.
Maximum Cost per Click
Finally, to estimate your maximum Cost Per Click, use the following formula. Multiply the unique value of web visit by the profit margin. If your profit margin is 30% and your unique web visit value is $5 your cost per click must not be more than $1.50.