Face it: everyone has a limited marketing budget. While one limit may be higher than another, everyone has a limit at some point. The question for every marketing program will inevitably be: is this going to pay off?
This is a fantastic question, and one that needs to be addressed closely before the launch of any campaign. However, it’s not as easy as looking at the cost of a product or service and the cost per click to determine the immediate value and if the marketing is going to pay for itself. Here are several steps you should consider as you think through any marketing program or campaign.
Budget, Cost & Value
It’s pretty easy to determine the cost of an acquisition, as well as your immediate profit (or loss). What’s more challenging to determine is what budget you should have for your campaign. Here are the components you need to consider:
- Cost Per Click (CPC) for your keywords.
- Conversion Rate – you may have to estimate this, and there are plenty of studies about what an industry average may be for you (e.g., ecommerce sites have an average of 2-3% conversion rate).
- Cost Per Conversion – This is extremely important to consider. If you have an average CPC of $1.25 and a conversion rate of 2.5%, then your cost per conversion is $50. This cost per conversion is how you determine your budget, by simply looking at how many conversions you want to achieve.
- Actual Profit Per Order/Product – This will help you determine if you will have an immediate return on your marketing dollars.
The Caveat – So there is one little hiccup in the above calculations. When determining your budget, you must keep in mind that conversion rates are not linear. If the number of times your ad is shown is not high enough, you increase the risk of missing the people who will actually purchase when they click through to your site. So, the more your ads are shown, the more clicks you receive, and the higher your conversion rate will be.
Annual/Lifetime Customer Value
The cost to keep a customer is generally much less than the cost to acquire a new customer. Therefore, it’s important to keep in mind the repeat and referral business that will come as part of your ROI projection.
To calculate this, consider the type of product you have, and the need for people to reorder or to shop multiple times a year. So the calculation would look like this:
So, if you’re running an ecommerce store with an average profit of $35 per order and people order 4 times a year, you’re going to have an annual value of $140. As you can see, this kind of calculation is going to dramatically impact what your budget will be for your campaign.
Making Sense of It All
It can be challenging to see the forest through trees at times. When you’re constantly looking at your P&L figures, and trying to determine how to build your business, it’s easy to forget all the calculations you need to consider as you think through budgets and tactics.
If you need a hand evaluating your marketing, or making a plan for how to market, then give our team a call. We are happy to work with business of all types and sizes to see how to make Internet Marketing efforts more effective.
