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.
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.
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.
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 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
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.