Pay-per-click campaigns are fast becoming standard strategy for Web shop owners who want to drive traffic to their sites. However, an alarming number of e-tailers fail to follow through by evaluating the effectiveness of their advertising plans because they simply don't know how. Steve DiPietro, president of the online marketing firm DiPietro Marketing Group, shares a case study in which he helped a client analyze a PPC campaign and then offered a solution broken down into five steps that any online merchant can apply to their own venture.
An e-commerce business owner was very happy with her pay-per-click (PPC) advertising efforts. She had been using Google AdWords as well as Yahoo Sponsored Search for nearly two years. She found campaigns easy to manage — set them up, let them run, and presto — watch the orders roll in. The monthly bill was automatically charged to her credit card. It was easy enough.
Success was defined as "orders coming in." That's great, except for one thing — no one at the company could answer the most telling question about their PPC advertising: Are you making or losing money on your PPC investment?
Determine Your Gross Profit To begin to answer that question, the business owner and I ran a QuickBooks report to find out the average Gross Profit on each sale from day one of the business to the present. The average Gross Profit on each order is the revenue of all the orders in a given period, less the cost of all the goods sold during that same period, divided by the amount of orders. To illustrate:
Example
START WITH
Total Revenue* over a given period of time
$75,000
SUBTRACT:
Total cost of all the goods sold
-$49,725
WHAT'S LEFT:
Total Gross Profit
$25,275
DIVIDE:
Total Gross Profit
$25,275
BY:
The total amount of orders
835
RESULT:
Average Gross Profit Per Order
$30.27
* Excluding shipping and any sales taxes.
After running the QuickBooks report and doing the math, the owner and I found that the Gross Profit for her particular business was $29.25.
Compare Gross Profit With PPC Cost/Conversion The reports were showing that the AdWords Cost/Conversion was $92.86. The business owner had never known what to make of this figure; it wasn't relative to anything. But, now, she had the store's average Gross Profit amount, which she could compare to the Cost/Conversion amount:
Gross Profit $29.25
AdWords Cost/Conversion $92.85
So, yes, "orders were coming in," alright. However, obviously, if you're paying $92.85 for every sale generated by AdWords out of $29.25 of gross profit, you'll be out of business in short order. This is exactly where this particular business was headed.
Other Factors To Consider In addition to the high $92.85 Cost/Conversion rate, there was more bad news. The AdWords reports were showing the ads had only a .74 percent click-through rate (CTR). This meant that less than one out of every 100 people searching on a phrase was clicking on the ad for this business.
There are two primary explanations for such a low CTR. First, the bids are so low that ads are not being displayed in the top positions. Just showing up once on a Google search results page is counted as one impression, regardless of what position the ad is in. But, the ads in the top positions are the ones that get most of the clicks. Lots of impressions but few clicks equals a very low CTR.
The second potential explanation for such a low CTR is poorly written ads. Regardless of the position of the ad, if it doesn't resonate with prospects, and motivate them to click, the CTR will be low.
Even worse, the conversion rate was a paltry 0.7 percent, meaning less than one out of every 100 visitors was buying after clicking through on an ad and landing on the site.
So, the facts revealed that the company's PPC advertising situation looked like this:
Very few people clicking on the business' ad (a very low 0.74 percent CTR)
A high price was being paid to AdWords for each of those few who did buy ($92.85 cost/conversion).
What to do? There are five areas that can be addressed in order to make money from a PPC investment.
1. Determine An Appropriate Cost/Conversion Amount What any one business should be paying to acquire a new customer varies greatly by business category, as well as by individual business. There are many factors involved.
For example, in some types of businesses, repeat sales from the same customer are common. You invest in AdWords to get the customer the first time. Then, in theory, for subsequent purchases the customer is going directly to your site, not through Google and clicking on your ad again. Many of these types of businesses are willing to break even on the initial purchase. To illustrate, given that $29.25 is the gross profit for the store in this case study, the owner should be willing to pay up to $29.25 to convert a new customer from AdWords if her business was one where customers make many repeat purchases.
The idea here is to break even on the initial sale, and make your money on additional sales down the road. This is where efforts such as e-mail marketing to the house list (existing customers) come into play. They help ensure those repeat purchases.
Note that cost/conversion equaling the gross profit amount isn't quite breaking even. There's still that sale's share of rent, utilities, etc. to consider. However, for marketing purposes, giving up all of the gross profit in exchange for acquiring a new customer can be considered breaking even.
Other businesses must make money on each order as merchandise they sell is usually purchased just once, or perhaps every once in a great while. The e-commerce establishment in this case study falls somewhere in the middle. Mostly, its customers are "one and done," but there is a contingent of loyal customers who buy regularly.
For various reasons, the recommendation made to the business owner was to shoot for a $14 Cost/Conversion target level with AdWords. This represented about half her gross profit amount of $29.25.
However, given the poor conversion rate of 0.7 percent, a $14 cost/conversion target would mean that a maximum of only $0.10 per click could be bid.
Conversion Rate
0.7% or 0.007
#Clicks Needed to Get 1 Sale
142
Maximum Per Click Bid
$0.10
That's a lot of clicks to get one sale, and not very much to bid with. So it makes sense to then plan on a way to increase the maximum bid amount.
2. Concentrate On Factors That Increase the Average Order Value By increasing the value of the average order, the store's gross profit will increase in turn. A larger gross profit means PPC bids can be higher.
Original
New
AOV
$65
$125
Avg. Gross Profit
$29.95
$56.25
Conversion Rate
0.7% or 0.007
0.7% or 0.007
# Click-Throughs Needed For 1 Sale
142 (1 sale / 0.007)
142 (1 sale / 0.007)
Cost/Conversion Target
$14
$28
Maximum Per Click Bid
$01.10/click ($14 / 142 clicks)
$0.20/click ($28 / 142 clicks)
In this example, a doubling of the AOV leads to a doubling of the gross profit. The result is a doubling of the maximum bid that can be afforded to $0.20 per click.
3. Get The Conversion Rate to An Acceptable Level The number of prospects out of every 100 that buy can vary greatly. Some online businesses have double-digit conversion rates, 10 percent, even 12 percent or more. Others have 5 percent or 6 percent rates. Many have lower rates. This particular business had a very low 0.7 percent AdWords conversion rate.
A site's conversion rate is the result of many influencing factors, such as the ability to build trust, the message — both stated and unstated — that is communicated to prospects and the degree to which it resonates and motivates them, product selection, quality of product photography and descriptions, merchandising techniques and so on.
Note that these are basically the same factors that influence the AOV. So, by addressing them, both the site's AOV and its conversion rate can be significantly improved at the same time.
A rule of thumb is that whatever the conversion rate is for your business, do what has to be done until you double it. Then, try to double it again. Do this by continuously working and tweaking the influencing factors.
When you succeed in increasing the amount of every 100 prospects that buy, your PPC campaigns will require less click-throughs to generate a sale, which will, in turn, allow bids to be raised so that your ads can be displayed in a higher position. This should result in a greater CTR, bringing even more prospects to the site.
Original
New
Conversion Rate
0.7% or 0.007
2.3 % or 0.023
# Clickthroughs Needed For 1 Sale
142 (1 sale / 0.007)
43 (1 sale / 0.023)
Cost/Conversion Target
$14
$14
Maximum Cost/Click Bid
0.10/click ($14/142)
$0.33 /click ($14/43)
This example shows how increasing a site's ability to convert visitors into buyers (increasing the conversion rate) can result in a lot more money being available for higher PPC bids.
4. Test Variations of Ads Ads that are poorly written will usually result in low CTR. The way to find out if your ads are working is through continual testing. Fortunately, AdWords makes it very easy to test variations of the same ad. Furthermore, don't make the mistake of thinking you're limited by what you can do due to space. A prospective client said to me just last week that "there isn't much you can do with just 2 lines in a PPC ad."
Wrong.
Take for example the two ads that follow. The key phrase is 'XYZ Brand.' XYZ Brand is sought after, but not easily found online.
Original Ad: Title XYZ Brand; Description: We Have XYZ Brand.
Version 2: Title XYZ Brand In Stock; Description: Hard-to-find XYZ product type one, two, three, four.
Believe it or not, Version 2 nearly doubled the CTR. Obviously, even a simple change that can be done by testing different ways of saying the same thing can accomplish a lot.
The lesson here is to take advantage of the ability AdWords gives you to test different ads. The objective is to find the best way to say what is most meaningful to potential shoppers to motivate them enough to click on your ad, and not a competitor's. Even a small increase in the CTR can add lots of money to the bottom line over time.
5. Back the Most Important Key Phrases With As Much Money As You Can The owner of the store in our example had been bidding the same amount for all of her couple hundred key phrases. Additionally, she had the same daily budget set for all the campaigns.
What we did was whittle down the list of key phrases to just 20-25 that were considered to be the most important to the business. These phrases then were supported with 85 percent of the monthly PPC budget. By doing this, we accomplished two things.
First, allocating more of the available funds to much fewer phrases allowed for increased bid amounts for those particular phrases. This led to higher ad positions, which led to higher CTR.
Second, the campaigns for these most important phrases were given an increase in the daily budget. The daily budgets for the remaining phrases were cut or eliminated altogether. This enabled us to be continuously advertising throughout the day with out fear of draining the daily budget early in the day.
Capping an important campaign at, say, $5/day, and the budget running out around 5 p.m. is like a store at the mall closing its doors at that time. What about evening shoppers? Do you really want to send them off to a competitor at a time when they are searching on your important key phrases and may be ready to buy?
How The Business is Faring The business is already making money on its PPC advertising investment. Here's a look at the numbers.
Before
After
Average Order Value
$65
$125
Gross Profit
$29.25
$56.25
Click through Rate
0.74%
0.78%
Conversion Rate
0.7%
2.52%
AdWords Cost/Conversion
$92.85
$10.46
The bleeding was stopped in that the Cost/Conversion was reduced to $10.46, even below our target level of $14.
We first attended to the factors that influence AOV. It nearly doubled, which raised the average Gross Profit Margin, to $56.25. Addressing those influencing factors also greatly increased the AdWords Conversion Rate. Before, the business owner was paying AdWords $92.85 for every sale out of a Gross Profit of just $29.25 — a huge loss. Now, just $10.46 was being paid to AdWords for every sale out of $56.25 in Gross Profit — a very nice gain.
Although a plan has been put in place for the most important key phrases as described above, the AdWords CTR has not changed much. However, the very positive results seen so far provide the additional money needed to substantially increase the per-click bids, which will lead to higher ad positions. Also, we can now begin testing ad variations, including the use of special offers. These additional two steps should increase the CTR, leading to more visitors to the site, and yet even more sales.
All five of the above areas are intertwined. What is done in one area will affect the rest. Addressing all five issues continually should result in the building of positive momentum as each effort plays off the others.
What To Do If You Don't Have All The Tools To do anything, you need reports. If you can't get data like Gross Profit out of your accounting software, figure it out by hand using just three month's worth of order information. It will not be perfect, but it will give you a close enough number that can you can use it.
Without the AdWords tracking code on the order confirmation page, the Cost/Conversion can't be determined. Most small businesses, and some medium-sized companies, too, do not have a tech person to do it. In this situation, rest assured, it is a very simple process; anyone can do it. If you lack the confidence or time to do it yourself, and you use an all-in-one e-commerce provider such as Merchandizer, MonsterCommerce, Volusion, etc., ask their tech support for help.
Steve DiPietro is president of DiPeitro Marketing Group as well as a regular contributor to ECommerce-Guide.com.
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