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What are the primary metrics that define success for your PPC campaigns? Columnist Matt Umbro explores the pros and cons of optimizing for some common paid search metrics.
There are many paid search metrics that can define success in an account. In one account, the goal may be to reduce the cost per conversion, while another account may care more about showing a better return on investment.
Often, optimizing for these metrics requires differing strategies. That’s why it’s important to understand each metric as it relates to the entire account, instead of viewing in a silo.
In this post, I will explain the pros and cons of focusing on individual metrics as a way to portray how they are all intertwined. The success of any paid search account requires advertisers to consider all metrics, even if one is preferred. The metrics I will be reviewing are:
- cost per conversion;
- return on investment;
- advertising to sales; and
- average order value.
The common theme you’ll be reading about is efficiency. In other words, if you are solely focusing on improving the efficiency of these metrics, you will lose conversion volume. As you review each metric, consider the importance of new acquisition in comparison to hitting efficiency goals.
Cost per conversion
Pros: This metric tells you how much you are paying per conversion. The conversion can be anything you deem important, but the most common examples are purchases and lead generation form fills. For example, if I spend $40 and see two conversions, my cost per conversion is $20.
Cost per conversion is a great way to set thresholds on what you are willing to pay for each conversion. Let’s say you are selling sweatshirts and don’t want to pay more than $10 per conversion because you will lose money if the threshold is any higher.
You can set your budgets and bids accordingly by striving to hit this number. The same thing goes in lead gen campaigns. You may determine that a lead is worth $40, and all optimizations should be made to be under this number.
Working toward a cost per conversion goal ensures that you are cutting out inefficient spend.
Cons: The main negative with optimizing toward cost per conversion is that it can hamper account growth, especially in e-commerce accounts. Using our sweatshirt example, the average cost per click may be $3. After only a few clicks, we’ve spent more than $10.
Once enough data is collected, we may find that the ideal cost per conversion is closer to $20. If we don’t adjust our goal, we’re losing out on conversions — and potentially larger orders — in order to stay within our threshold.
Ideally, the marketplace would determine what your cost per conversion goal is, but that doesn’t always happen.
Return on investment (ROI)
Pros: Simply put, ROI looks at how much revenue you made after all expenses. Aside from the actual revenue, this metric can be expressed as a percentage or dollar figure. If you spend $10K and make $20K, your revenue return is $10K. Looking at ROI is critical in e-commerce accounts, as you can easily determine how much you are spending vs. how much you are making.
ROI is a great high-level metric to gauge account performance. Especially for business owners who only want to see the bottom line of their paid search efforts, ROI accomplishes this goal. The problem is that ROI can be misleading.
Cons: Similar to cost per conversion, optimizing for higher ROI limits growth, while potentially hindering new customer acquisition. Using a rudimentary example, let’s say the revenue return is $100K with 1,000 sales. However, by investing additional budget and only seeing a return of $80K, you would garner 1,200 sales.
The question becomes whether those 200 extra sales are worth a loss of $20K in revenue. They may not be, but those 200 extra sales also represent customers you would not have received otherwise. And with all sales, there is the potential for repeat purchases down the line.
Advertising to sales
Pros: Calculated as a percentage, this metric divides ad spend by revenue. If you spend $500 and make $2,000, your advertising to sales percentage would be 25 percent. The lower this percentage is, the better, as it indicates greater efficiency and ultimately the more revenue you are making per dollar spent.
Cons: It isn’t necessarily a negative aspect, but you need to be cognizant of overall costs. Depending on the industry, a higher advertising to sales percentage may be okay, especially if the product is one that facilitates repeat buyers.
A product like air filters, for example, is something that needs to be bought on a consistent basis. The initial advertising to sales percentage may be 50 percent, but over time, that metric drops to 30 percent because there is repeat business.
Average order value (AOV)
Pros: AOV tells you how much customers are spending per purchase. If you see 10 orders and total revenue is $1,000, the average order value is $100. AOV is influenced by many factors, including:
- product sale price;
- promotions (free shipping, discounts and so on); and
- customer loyalty programs.
Sometimes there is a disconnect in what the advertiser perceives the AOV should be and what it actually is. For example, 80 percent of the products on a site may cost over $100, yet the AOV is only $75. These numbers indicate that the AOV is being weighed down by consumers purchasing the 20 percent of products that cost less than $100.
From the paid search side, a lower AOV may indicate faults in the strategy. Perhaps the advertiser is targeting the wrong keywords and associated products or isn’t specific enough in messaging. Someone looking for “cheap sunglasses” most likely isn’t in the market to buy a pair that costs over $100. The advertiser may want to:
- implement a negative keyword list around “bargain” terms;
- remove lower-cost products from the Shopping feed; or
- in ad copy, indicate that prices “start at x” to prequalify the user.
Cons: Just like cost per conversion, AOV doesn’t take into account new customer acquisition. Furthermore, it’s easy to disregard the total revenue accrued. Using our example from above, the AOV may be $75; however, let’s say total revenue is $7,500 for a total of 100 orders. You could have an AOV of $100, but it might mean only 60 orders for a total of $6,000 in revenue. In this case, the lower AOV resulted in more orders and revenue.
By themselves, each of these metrics is a determining factor in paid search success. However, you must consider all of them when setting account goals and making optimizations.
Solely focusing on individual metrics in the name of efficiency can hinder account growth. Assess and determine how critical each metric is and what thresholds you are willing to allow in the name of successful and consistently prosperous accounts.
Some opinions expressed in this article may be those of a guest author and not necessarily Search Engine Land. Staff authors are listed here.