(For part 1 of this post, go here)
Wow!
What a diverse response…Â
Indeed Ad #1 has a higher ROI (return on Investment).
That is true since I pay $6.84 to make $27
which is less than what I pay for ad 2 to make the
same money.
The real question here not which AD yieds the most
ROI, but which AD is going to bring more PROFIT for
the LIFE of the campaign.
Lets take a deeper look.
When it comes to PPC advertising, we usually look
into 2 important conversion rates.
a) the CTR (conversion rate of impressions to clicks)
b) the Conversion Rate of a click to action (sale, lead, etc)
However, most people take the “conversion rate to action”
thinking that the higher it is, the more money they make.
For example-
you may hear, “I get a 5% conversion rate”, I am so proud 🙂
But then, how much of that same traffic can you get,
and how fast. If I can supply you with 100 of the same
quality people every day, you will consistently make 5%
but you will only make 5 sales a day. no more.
If I can supply you with 300 less targeted people every day,
and you only convert at 3%, you can make 9 sales a day.
Even if you paid more for #2, it may make you more money.
You just have to look at the numbers.
Back to our PPC example.
usually to get better targetted people, you will have to
prequalify them with your ad copy which usually leads to
less CTR.
CTR can control how fast you are getting people to your site.
An ad with 2% CTR compared with an ad that has 1% CTR gets 2 times
the traffic for the same time, or in other words for the
same number of impressions.
That is why you have to take both conversions into
consideration when you are estimating your profit.
In other words, you want the conversion rate of IMPRESSIONS
into ACTIONS and to try and better that number.
The following formula will tell you the Conversion Rate
of Impressions NOT clicks.
Conversion Rate * CTR / 100
so if you have 2% CTR and a 2% conv rate,
the above formula will give:
2 * 2 /100 = 0.04%
So to see how much profit you make per impression
you do this:
0.04% * (Sale price – Cost Per Conversion)
This will generally give a very small number and you may
have trouble doing it with your calculator, so if you
multiply it by 1000 you will get the profit per 1000 impressions
which will be easier to work with.
Now that we know the theory, lets get back to our problem
to see which ad is better in terms of profits.
Ad A:
Conversion Rate = 0.8%
CTR= 1.59%
0.8 * 1.59 / 100 = 0.01272%
Profit per 1000 Impressions:
0.0001272 * ($27 – $6.84) * 1000 = $2.5643
Ad B:
Conversion Rate = 0.6%
CTR = 2.34%
0.6 * 2.34 / 100=Â 0.01404%
Profit per 1000 Impressions:
0.0001404 * ($27- $8.58) * 1000= $2.5861
Now this shows that AD #2 is slightly better than #1.
There is also another issue with google. When dealing
with conversion rates, google rounds the numbers so
sometimes they are not as accurate.
Here is a more accurate formula:
(Sale price – Cost Per Conversion)*(Sales/Impressions)*1000
will tell you the profit per 1000 impressions
and to get the number of sales do this (if cost per conversion is >0):
COST/(cost per Conversion)
With this formula you will get:
Ad A:
$2.4659 profit per 1000 impressions
Ad B:
$2.6332 profit per 1000 impressions
Ad 2 will profit 17.73 cents more than Ad 1 every 1000 impressions
In our example the difference is not much. But keeping in mind
this, can show you hidden money in your ventures.
Also, Ad 2 will get you more customers than ad 1. More customers
means more future profits etc.
Considering this, Ad 2 is a winner to me.
I have a reason I let both ads running. I also have a 3rd ad
running alongside these ads. (that is why %served doesnt add up to
100)
I will get into that at a later post.
I know the numbers can be taunting to some, so if you have
any questions please post a comment, and I will be happy to
assist you.
Till next time,
Partner to Your Success,
-Socrates Socratous
Posted by: Socrates Socratous Mar 12th, 2007