It’s easy to set PPC bids based upon a direct response ROI. Using this simple metric makes it simple to base every keyword bid on its profit and conversion rate. However, are those bids accurately reflecting the entire revenue your PPC account generates?
To get a complete picture of revenue, and to make sure you aren’t underbidding and leaving profit on the table on some of your most important keywords, you should ask yourself the following questions:
Do consumers who buy from your site usually come back and buy again? Do you know how often? Are the purchases more or less the second time around?
Do you have recurring revenue from a sale such as a subscription or ongoing fee? Do you know how long those consumers stay subscribed to your products?
If you don’t have answers to those questions, you may be making one of the most common mistakes in bidding: not using Lifetime Visitor Values.
When determining your PPC bids, the general calculation is:
(Revenue per conversion / desired ROI) X (conversion rate) = Max Bid
This calculation makes it very straightforward to set keyword or AdGroup level bids that meet your advertising goals. To increase your bid, you need to increase your conversion rate, revenue per conversion, or lower your ROI expectations.
Of course, there are others who bid by profit, return on ad spend, etc. Each of these is a good way to bid depending on your advertising goals and how you wish to measure the effectiveness of your ad dollars.
However, for websites that generate additional revenue past the first sale, the Max CPC formula should be adjusted to:
((Revenue per conversion)+(Repeat sales x average repeat sale amount)/(desired ROI))X(conversion rate)=Max Bid
This is a fairly simplistic look. Let’s see how those formulas adjust your max bid.
If you made the assumptions that:
- Your average conversion rate was 2%
- Your average first sale was $100
- Your average repeat sale was $50
- Your average customer bought from you 3 times
- You desire a 200% ROI
In the first formula for max bid, the numbers would look like:
- (Revenue per conversion / desired ROI) X (conversion rate) = Max Bid
In the adjusted formula, the numbers now look like:
- (((Revenue per conversion)+(Repeat sales x average repeat sale amount))/(desired ROI))X(conversion rate)=Max Bid
Changing the bid from $1 to $2.50 actually maintains the same ROI for your company. However, if you took into account total profit, the numbers would also continue to climb.
The most expensive marketing cost is acquiring your customers in the first place. The cost of the first relationship with a customer far outweighs the cost of re-marketing to someone who has placed trust in your company.
Why does this matter?
Let’s use a more real life example to illustrate moving from a single point of ROI calculation to using a Lifetime Visitor Value bid calculation.
One of my favorite industries to highlight why including total customer revenues is extremely important is the ultra competitive hosting industry.
If you think about a hosting service with these numbers:
- $10/month hosting
- 5% conversion rate
- 200% desired ROI
The max bid for any single PPC account would be $0.25. (($10/200%) x (5%)= $0.25).
A $0.25 bid in the web hosting industry will not bring you very much traffic, as your ad will be buried several pages deep within the search results. Even with all the upsells that can be layered onto an account (email, storage, domains, privacy, bandwidth, website builders, etc), the numbers will never appear to work well. While someone will technically meet their desired ROI, the total profits will be so low that the company will not be around long.
However, if you added one crucial piece of information to the above numbers, subscription length, the dynamics of bidding and profit suddenly change. If our hypothetical hosting company knew that their average account stayed with them for 26 months, the formula would take on new life, resulting in a max bid of $6.73. ((($10)+(26x$10))/(200%))x(5%)=$6.75
A $6.75 vs $0.25 max CPC will significantly change one’s placement and traffic.
Adjusting bids for lifetime visitor values also applies to the retail, service, and any other market with repeat customers. Once you start doing the math around how repeat sales from customers affect your profits, you can see why airlines, hotels, and even grocery stores spend so much time, money, and energy around loyalty programs.
Marketing is not just about the acquisition of a onetime customer. It is also about building a relationship with your customers. It is time to stop advertising and start marketing.
There are a number of metrics that are very important to understand in making your business profitable. Some of them can be very difficult to measure and ascertain. However, the long term payoff from learning how to calculate these numbers goes far beyond just changing your max bids.
They are also business metrics or KPIs (key performance indicators). When digging into these numbers, you can often uncover hidden areas of profit or loss that can give you direction in how to improve your business.
If you currently don’t know if you have repeat customers, it’s time to start aggregating the data. Understanding your customer, his habits, and her tendencies can significantly improve your conversion rates, lifetime visitor values, and ultimately lead your company to be more profitable.
Opinions expressed in the article are those of the guest author and not necessarily Search Engine Land.