The Economics of Online Marketing

The relationship between what you can pay (max cost per click, or CPC), how your Web site performs (sales per click, or SPC), and your target efficiency (A/S) is simple math:

max CPC = A/S x SPC

For example, consider a retailer seeking a 35 percent ad-to-sales efficiency with a Web site that sells $120,000 online to every 100,000 qualified visitors. After tweaking Web demand sales to account for frauds, cancels and contact center spillover, she estimates her adjusted SPC to be $1.30. To hit her efficiency target of 35 percent, she must pay on average no more than 45 cents per click for those 100,000 visits.

Warning: Don’t Drive PPC Campaigns by Averages

While averages are useful to describe portfolio economics overall, they’re not helpful for the actual management of your online pay-per-click (PPC) search efforts. Averages apply to populations, not individuals.

Your actual SPC estimates will vary widely across your keyword portfolio. Different terms will have different SPC measures. And when you delve into it, you’ll find these term-level SPCs will vary with the ad copy, destination URL, season, day of week and time of day.

Returning to the previous example, that retailer may be able to afford an average 45 cent CPC across her portfolio. But many of her ads wouldn’t meet her efficiency target even at a penny per click, and a handful of her best ads easily would beat her A/S target, even at several dollars per click.

With online PPC advertising, the devil (and the profits) are in the details. Make sure your programs are managed at the keyword level, with smart bidding adjustments for copy, landing page, seasonality, time of day and day of the week.

What Kind of Customers?

Traditional catalogers know that buyer response rates drive profits. Accordingly, many catalogers spend more aggressively acquiring new customers, often running acquisition efforts at breakeven (plowing all gross margin obtained from new customers into marketing to new customers).