Why You Should Give Some Of Your PPC Spend To A Conversion Optimizer

You may find the subject of this column a bit self-serving, since I am a conversion optimizer.

Well, it is.

But, I hope to provide some basic math that will support my claims.

If you’re spending money on a pay-per-click campaign or spending someone else’s money on a pay-per-click campaign, you should give some of your pay-per-click budget to a conversion optimizer.

What We Know

Pay-per-click data gives us things like: how much we spent, how many people saw our ad, how much revenue was generated, and how much those clicks cost. With this dataset, we can then calculate things like cost-per-click or how much revenue-per-click we earned.

All of these numbers are interesting, but only really useful if we know how they impact each other.

How can we use these numbers to improve our sales revenue? If we change one thing — if we do one thing better — how can we expect our results to change?

What Metrics Correlate To Higher Revenue Or Lower Costs?

To make this pay-per-click data useful, we need to look at how different numbers relate to each other. If something correlates well, then the datasets move together. So, we can assume that if we change one, we’re likely to influence the other if it has a high correlation.

  • Orders correlate to sales: keywords phrases that generate more orders generate more sales
  • Clicks correlate to sales: if a keyword phrase generates lots of clicks, we can be fairly confident of more sales
  • Clicks correlate to costs: this is Google, every time someone clicks, we have got to pay
  • Clicks correlate to orders: keyword phrases with lots of clicks generate lots of orders

We know if we get more traffic, we’ll get more sales. More traffic equals more orders, which equals more sales. It makes sense without a lot of study.

It’s the reason people focus on driving traffic more than optimizing the page that the clicks go to.

What Metrics Don’t correlate?

I assumed that some of our key conversion-side metrics would correlate to ad-side metrics. As it turns out, they don’t.

Conversion rate moves independently of sales. I can’t say that a keyword phrase with a high conversion rate will necessarily have high sales.

Likewise, Average Order Value doesn’t correlate to sales. An increase in AOV will, by definition, give you more money, but a keyword phrase with a high AOV doesn’t predict higher sales.

Hmmm…

Conversion rate correlates negatively to cost and clicks. In other words, keyword phrases with a high cost or a high number of clicks are more likely to have a lower conversion rate.

The bottom line is: conversion-side metrics, like conversion rate and Average Order Value, move independently of ad-side metrics across keyword phrases. This means we need to optimize them independently.

A high performing ad may actually be hampered by a low-converting destination.

Big Moves In Traffic Yield, Small Moves In Revenue

A certain number of impressions are going to turn into clicks, and a certain number of clicks will turn into conversions. Logic says: if you expand those impressions, you’d get more clicks and therefore, more conversions.

The challenge is that it takes large increases in impressions to yield small increases in conversions. Plus, as we increase traffic, we tend to get lower and lower quality traffic, and our click and conversion rates will actually start to go down.

 

More-Impressions

To see even a small move in conversion, we have to really increase our impressions.

Conversion optimization is more efficient; it goes right to the source. With optimization, we’re getting more conversions with the same number of impressions and the same number of clicks.

Conversion Rings

With optimization, we go straight to the source. There is no need to increase impressions or clicks.

Focus On Revenue Instead Of Clicks

We have to ignore conversion rate! What? Ignore conversion rate? Isn’t this article all about how awesome conversion is? Well, yes, but we have to put conversion rate aside for a few minutes.

Conversion-AOV

Conversion rate rises when orders increase. If we increase orders and keep revenue the same, we will lower Average Order Size.

Conversion rate has some problems. If we want to increase our conversion rate, we can do one of two things. We can either increase our orders, or we can decrease the number of clicks.

If we focus only on conversion rate, we can just go in and cut our prices by 50%. It will increase our orders and our conversion rate, but we won’t make any more money. That’s not a good thing.

What’s the point of a high conversion rate and no revenue?

We need a metric that controls for changes in Average Order Value when talking about optimization. Conversion rate doesn’t take Average Order Value into account.

If we increase the number of orders, but keep the revenue the same, we end up with a decreased Average Order Value even though we got a high conversion rate. The conversion rate is misleading.

Optimize For Revenue-Per-Click, Not Conversion Rate

RPC

It’s important to keep Average Order Value in mind. Using Revenue-Per-Click instead of the Conversion Rate does that.

Conversion Rate and Return on Ad Spend don’t take Average Order Value into account. When we track revenue-per-click instead, we bring both conversion rate and Average Order Value together. We may raise the conversion rate for a given keyword, but we’ll never do it at the cost of Average OrderVvalue.

For leads, we have to optimize for conversion rate because that’s all we have. To calculate Revenue-Per-Click, we’d have to monitor our lead conversion rate.

The Math: How Much Of Your Ad Spend Can You Give Your Optimizer

Let’s look at a 1.0% increase in revenue-per-click. It’s a one-to-one ratio; so, a 1.0% increase in revenue-per-click is a 1.0%, increase in sales.

If we start with $5.45 revenue-per-click, and increase it by 1.0%, we get a new RPC of $5.51. On sales of $500,000 we get a revenue increase of $5,000/month or $60,000/year.

This $5,000 extra is roughly 3.6% of our ad spend. And, our net revenue is the same — $5,000 per month — since we didn’t have to buy any more traffic.

This means we can pay someone up to 3.6% of our ad spend to optimize, and if they generate at least a 1% increase in RPC, we break even.

Maybe a 1% increase isn’t that interesting, but let’s look at a 10% increase in the revenue-per-click. This gets us an average revenue-per-click of $6.00. That’s $50,000 a month or $600,000 per year.

Now, we can pay your conversion optimizer closer to 36% of our ad spend and still break even.

Of course, it would be unrealistic to pay them 36%. However, this gives us a model for deciding how much to invest in conversion optimization.

We’ve got a model where we can say, “You know what, if we took $5,000 or $10,000 a month over six months, and we are able to get a 5.0% or a 10% increase in revenue-per-click, we would make out like bandits.”

There is no increase in ad spend. There are no more clicks needed.

With conversion optimization, we see SEO-like returns on our investment. The improvements we make will keep for a long time so we can benefit from them month after month.

Plus, higher quality scores associated with higher conversion rates mean higher ad placements without raising our bids.

When you invest in conversion optimization, you can use the extra money you make on your PPC campaigns to lower your ad spend, increase your bids or buy expensive cars. The choice is yours.

 

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

Related Topics: Channel: Analytics | Search & Conversion

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About The Author: is the Conversion Scientist at Conversion Sciences and author of Your Customer Creation Equation: Unexpected Website Forumulas of The Conversion Scientist. Follow Brian at The Conversion Scientist blog and on Twitter @bmassey

Connect with the author via: Email | Twitter | Google+ | LinkedIn



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  • Pat Grady

    Love your article, really love it!

  • Pat Grady

    “and Return on Ad Spend don’t take Average Order Value into account”? I know what you meant here, but think you need to clarify for others.

  • http://www.delivra.com/ Cody Sharp

    Nice article. One question, in your experience do Bing Ads or Google Adwords give you a better ROI?

  • http://www.facebook.com/forfunandfreedom Josh Davis

    I have been thinking about this more and more lately. Thanks for the great article!

  • http://conversionscientist.com Brian Massey

    Thanks, Josh.

  • http://conversionscientist.com Brian Massey

    I couldn’t comment. I’m sure the answer is “it depends.” If you figure it out for your niche, please let us know.

  • http://conversionscientist.com Brian Massey

    You must be a conversion optimizer! ;-) Thanks for the kind words, Pat.

  • http://conversionscientist.com Brian Massey

    Good input I’ll request an edit. Basically return on ad spend (ROAS) and average order value (AOV) can go up even if your conversion rate is tanking. Thats why RPC is a preferred.

  • Tom Bowen

    Good article Brian, with your trademark approach and humor included! Biggest keys to me are a) as you cast a wider net with your ad spend, you get less and less qualified traffc, and b) the improvements you make from Conversion Optimization last, while money spent on traffic gives you a one-time benefit only and you have to keep paying to maintain that level.

  • http://conversionscientist.com Brian Massey

    Tom, I can tell you were paying attention! It’s easy to assume that these concepts are “given” since we work with this stuff every day. I’m finding that they are not. Thanks for the comment. –Brian

  • Guy Hadas

    I believe that a conversion optimizing is actually the single most important part of internet marketing today. If you already have your website online, making it showing up and not selling, will not benefit you at all. Make sure you have a good conversion rate is what matters…

  • http://twitter.com/jwdlatif Jawad Latif

    It is beyond my understanding. Poor me :(

  • http://twitter.com/jwdlatif Jawad Latif

    What are the meaning of “Order” in this post. And how will you differentiate “Conversions” & “Sales”? These three terms have confused me a lot.

  • seohimanshu

    Excellent article Brian. Glad to meet someone who is not obsessed with conversion rate metric.

  • http://conversionscientist.com Brian Massey

    Remember that the quality of the traffic is very important for conversion rates. It’s the bottom of the CR fraction. But quality traffic isn’t enough.

  • http://conversionscientist.com Brian Massey

    Conversion Rate is helpful, but can be misleading. Like all statistics.

  • http://conversionscientist.com Brian Massey

    Jawad,

    Good questions. An order is a completed transaction, a sale, or a completed subscription. Conversion Rate is measured by number of transactions divided by number of visitors. Each transaction, or Order may include several products and a wide range of order prices.

    A conversion is an order. “Sales” in this article is “Revenue” or the dollars (pounds, yen, lire) generated.

    I hope that clarifies things.

  • http://conversionscientist.com Brian Massey

    Phone tracking is hugely important. When we work with phone conversions, we require the client to provide a value of each call. That value may change from month to month as their close ratio changes, or even change from call to call if they have sophisticated enough tracking. This allows us to understnd the quality of the calls in dollars.

    Calls can be tracked and can be assigned a dollar value, so they can be addressed in this model.

  • http://twitter.com/jwdlatif Jawad Latif

    So,
    Order = Conversion
    Sales = Revenue

    Right?

  • http://www.LeadDiscovery.com/ Jerry Nordstrom

    Wow Brian that was a ton of great information! I think you like what you do too much :-)

    Strictly from a PPC point of view, the analogy is that you have a twisted up water hose and optimization is the process of finding and grabbing the start of the hose then working out the kinks from one end to the other until you have an efficient straight line.

    Where is the “start of the hose” for the optimization process. I believe the starting point is mapping out the exact intent for each keyword and phrase you’re targeting and aligning them with your sales goal funnel.

    These assumptions about keyword search intent will drive the reasoning behind the decisions you make in evaluating the performance of each element within your campaigns.

    Keyword and phrase intent should also line up with the business’ objectives. As you know they are not always revenue driven or measured by a “sale”. Brand awareness campaigns, sharing, new follower growth etc can also be goals. Thus,many of the indicators you may use to optimize a ecommerce campaign would be vastly different than a brand awareness campaign.

    Optimization is a daily effort and should be the focus of every PPC marketer.
    Testing is where I may segment budget to a specific set of marketing assumptions to see if they work.

  • http://conversionscientist.com Brian Massey

    Your image of the water hose is vivid. While the landing experience and the ad-side are clearly independent, your landing pages have to pick up where the ads leave off. The keyword phrases predict intent for ad selection, and the ad provides intent for the landing page design and messaging. You can optimize these separately, but not independently.

  • http://conversionscientist.com Brian Massey

    That is correct.

  • http://www.rimmkaufman.com/ George Michie

    Brian, Good post. I’ll see your conversion and raise you a few. Sophisticated ecom advertisers should be driving by margin/click factoring in order cancels, phone, and softer metrics like catalog sign ups, email sign ups, store locator visits, etc. Moreover, by improving conversion rates on the landing page you improve margin/click for that ad allowing you to bid more at the same efficiency, placing you higher on the page and driving more higher quality traffic. A virtuous circle that will result not in moving budget away from PPC to conversion optimization, but rather because of conversion opt you can profitably spend more in PPC.

  • http://conversionscientist.com Brian Massey

    George you are absolutely right. One thing catalog sites can accidentally do with poor landing experiences is sell more of the low-profit stuff. Revenue-per-click may be going up, but profit is going down. Not a good outcome.

    When you calculate margin-per-click are you using the profit margin based on the cost of goods, or does the margin include the click costs as well?

  • http://www.rimmkaufman.com/ George Michie

    We do it different ways depending on the needs/capabilities of the client. Some will pass us the margin (or COGs) dynamically, others send us a back feed at night. Some catalogers share which orders were from new-to-file versus existing customers. The margin is tied to an order which is tied to the ad(s) that drove it and the click costs associated with those ads. We have some clients who want us to optimize for maximum marketing income (Margin minus ad costs minus management fees), but others want to invest some fraction of lifetime value in customer acquisition. Goals vary, of course. The beauty of having our own tech platform is we can do anything clients need us to do.

    The power of PPC is that it can ALWAYS meet ROI targets given sufficient data flow (harder with little folks because the signal to noise ratio is lower). None of the folks we work with are looking to reduce their PPC spend consequently. Instead they’re looking to grow it profitably, and conversion optimization can be a valuable piece of that.

    Are you going to be at SMX West? Let’s grab a beer.

  • http://conversionscientist.com Brian Massey

    George, it sounds like you’ve got some smart clients. I won’t be at SMX, but have a beer for me. Look me up if you ever come to Austin.

  • http://twitter.com/HiConversion HiConversion

    Check out http://www.hiconversion.com for e-Commerce optimization. Specializing in real-time optimization and reporting metrics like RPV (Revenue per Visitor)

  • http://conversionscientist.com Brian Massey

    Are you listed in the conversion lab? http://www.myconversionlab.com

 

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