PPC: When to Hold and When to Fold

ppc marketing

If you want a guarantee on Pay Per Click advertising, here is one you can count on: it may or may not work for your business.

Ok, so how do you tell if it is working? Or to use the poker analogy, when do you hold and when do you fold?

The answer lies in measuring your campaign. And to help you understand what you need to measure, consider this example.

  • Denise runs a tour company. The average value of a new customer is $750 in net profit terms.
  • Denise is looking at running a Pay Per Click advertising campaign.
  • The cost of clicks is on average $5 per click.
  • Based on tracking her website total bookings and total visitors, she knows that for every 100 visitors to her website on average she gets 2 bookings.

Looking at a Pay Per Click campaign for Denise:

  • if she pays $500 for 100 clicks she is likely to get 2 new customers
  • 2 new customers are worth $1,500 net profit.
  • $1,500 less the $500 of PPC costs means she would be $1,000 in front.

Investing $500 for a $1,000 return is a pretty good deal, so a PPC campaign is probably worth testing.

Calculating the profit from your own PPC campaign

If you know a few underlying figures, you can estimate the profit from running a Pay Per Click campaign.

Lifetime Customer Value (LCV) = the net profit from each new customer. Don’t forget to allow for initial and subsequent transations with each customer.

Cost Per Acquisition (CPA) = Cost Per Click divided by the Conversion Rate

  • Cost Per Click (CPC) = the average cost per click for a given keyword (the CPC depends on what other advertisers bid for the keyword and the quality score for your ads)
  • Conversion Rate (CR) = the average conversion rate for visitors to your website. Your CR depends on how well your website performs for you.

For an SEM Campaign, your profit per customer is calculated using this formula:

  • SEM Profit/Customer = LCV – CPA; or
  • SEM Profit/Customer = LCV – (CPC/CR)

In Denise’s example:

  • SEM Per Customer Profit = LCV – (CPC/CR)
  • SEM Per Customer Profit = 750 – (5/0.02) = 750-250 = 500

More on PPC Management.