CPA Vs. ROI Optimization: What’s The Best Practice?

Whenever I’m asked to audit a paid search account for a current or prospective client, my first question to the advertiser is: how do you measure performance? It’s a simple question and the usual response is CPA (cost per acquisition) or ROI (return on investment).

If the answer is CPA, then there are some follow-up questions: how many products or services are offered? And if the answer is more than one, then does each product cost the same? Moreover, is each product worth the same? What I’m getting at is that performance measure on a CPA basis is usually is a limitation of tracking—the advertiser cannot associate true revenue with the conversion. Managing to an ROI, and moreover, managing to maximize profit margin for each keyword will open up new doors for PPC efficiency.

Clients managing to CPA goals generally have several products or services. To see the underlying issue with CPA optimization, consider the situation where we have two possible conversions: one worth $20 and one worth $40. If we optimize to an average CPA of $30, we may be only selling $20 products and losing money. But if CPA optimization is the only option then there are a few best practices to find a good CPA to set as a goal: if the transactions occur online, then calculate the average order value and subtract the average variable cost to the advertiser—this is the max CPA. If the online conversion is a lead which requires offline sales, then multiply this CPA by the average offline conversion rate to define the eCPA (effective CPA).

Whether or not tracking is in place, advertisers are calculating a return on ad cost… so why not put the tracking in place to manage PPC account to the required return? In fact, revenue tracking is available for free in Google Analytics and can easily be merged with AdWords to provide ROI within the AdWords interface. While CPA optimization is a good way to get off the ground, it goes to another level when revenue dollars are brought into the equation.

The first step in ROI or ROAS (return on ad spend) optimization is to define the ROI goal. It will become abundantly clear which terms are ROI profitable versus which are ROI negative. Subsequently, as optimizers, we can try to make ROI negative terms profitable and if unsuccessful remove them. With an ROI goal set, we can manage individual keywords, keyword clusters, and the entire account to a goal ROI using basic logic. But we can take optimization one step further by combining CPA optimization logic with an ROI model to manage to gross profit margin.

Each keyword has a unique average order value (AOV) and it’s logical that any advertiser wants to maximize sales on keywords with the highest AOVs. Simply shifting budget toward the terms with the highest AOVs should maximize ROI. Taking a quick trip back to intro to microeconomics, at some point marginal cost will become greater than marginal revenue—in other words at some point the CPA is greater than the revenue being driven by that conversion. The goal is to identify this point of diminishing returns for each keyword. While this statistical model may be impossible to create perfectly due to noise in the data set, it lays out the groundwork and process for fundamentally sound gross profit margin optimization.

The backbone of a successful PPC account is business intelligence. The more data that can be associated and merged with search engine data, the better. In the end, the less business intelligence an advertiser has, the more money they are wasting. Why waste money when the solution is free?

Opinions expressed in the article are those of the guest author and not necessarily Search Engine Land.

Related Topics: Channel: SEM | How To: PPC

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About The Author: is in charge of client strategy at Fusion Tree, a performance marketing and analytics consulting group, and is based in the San Francisco bay area.

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  • http://speedypin.com SpeedyPin

    @Benny This is a great article amongst a few others I’ve read regarding CPA and ROI optimization for PPC.

    I agree with your thoughts on CPA optimization for PPC campaigns. But, I really want to focus on ROI optimization theory and share an issue that I’ve faced a few times when optimizing for ROI at the keyword level. Hopefully, you and/or other readers can shed some light upon this issue.

    With regard to ROI optimization at the keyword level, I did indeed achieve our target CPA; I paused keywords with a negative ROI. In doing so, however, I somehow simultaneously over-optimized the campaign, which obliterated conversions. I know this sounds weird, but it is exactly what happened.

    My theory is that I had correctly paused keywords with a negative ROI, but some of those keywords were acting as a Helper or Assist. These now paused keywords could not do their job, which was to lead potential customers to further investigate our products by clicking on ads generated by more relevant keywords within the same ad group. As a result, the campaign experienced a significant decrease in conversions and the CPA actually increased to an amount slightly higher than where it was just prior to my optimization. Good stuff!

    Note: The aforementioned campaign had approximately 100 active ad groups at the time. Each ad group represented a different country, which is also likely affected by many unique and uncontrollable outside factors. Further, this campaign is being run in an environment where the number of customers has decreased by over 60% in the past 3 – 4 years and the competition has increased.

    I still believe that ROI optimization is smart and necessary, and at the same time frustrating. One spends several hours doing what the data says is correct and the results tell you that you merely wasted several hours ($$$$$) of your time. Ouch!

    In the interim I have moved back to CPA optimization for this campaign. CPA is acceptable and conversions have held. No significant increases in either.

    Again, any input you can share would be greatly appreciated.

    Thanks for the very timely and wonderful post.

  • http://www.esearchvision.com Benny Blum

    @SpeedyPin I feel your pain re: over-optimization and the issue that you touch on is very relevant. Fortunately, AdWords released conversion funnel reports last week (http://tinyurl.com/ykgflo6). These reports effectively identify terms that are supporting conversions but aren’t generating the last click in the sales funnel. Look for these terms, isolate them and optimize the creative. Isolating terms will also help to serve as a reminder to keep bids up.

    Cheers,

    Benny

  • ashton walsh

     

    PPC Services

    1. If you see your ads are not performing well, the CTR is
    low and you are not getting many clicks, do not just increase the CPC (cost per
    click), you might end up spending a lot of money without attracting quality
    traffic.

     2. The quality score
    for Goole search is completely separate from the quality score for the search
    network. If your ads are doing well on Goole search page it does not mean your
    ads on the display network are also doing well nor can they benefit from the
    text ads’ good performance on Google’s search pages.

    3. Always being on the top as ranked 1-3 does not guarantee
    a high conversion rate. Make sure your ads rotate around the first page and
    even the second page. Not everyone looks at the top of the search query results
    page.

    4. Make sure your ads and keywords in one campaign are not
    competing against each other as a result of keyword duplication.    

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