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Jun 1, 2009
by Eric Leuenberger
Increasing your return on investment from paid search however is not as difficult as it may seem. It's true, you need to constantly keep a careful eye on your metrics and you must always be aware of your opportunity vs. expense but you can run a pretty successful paid search campaign when you pay attention to the right metrics.
Having said that, with a little knowledge at your fingertips you might not become an expert at paid search but your efforts will deliver a positive ROI if you follow the following 4 tips:
1) Focus on Conversion Rate not Click Through Rate (CTR).
Too often people focus on how many visitors (clicks) they receive from a paid search campaign. It is their belief that the more clicks they get, the more sales they should get. To make matters worse, there are companies out there who actually measure paid search success on CTR (click through rate) alone.
Any of these beliefs is a recipe for disaster. These methods often result in spending more money than you actually make on paid search. In other words, you spend more advertising dollars than you generate in sales. To correct this problem, you should focus on the Conversion Rate metric as it pertains to sales generated when running paid search. This is a more realistic indicator of whether your campaign is moving toward success or not. The formula for calculating conversion rate is:
Completed Actions (sales) / Total Number of Visitors (Sessions)
One reason many people overlook this metric might be because in order to calculate your Conversion Rate metric you often need to install the proper tracking code on the Thank You page of your website. For ecommerce sites this is most often the page a customer arrives at after completing a successful sale. The tracking code placed on this page gathers data on completed actions which, as I have illustrated, is used to calculate conversion rate.
All major paid search providers have code similar to this at your disposal. For Google Analytics this is called "conversion tracking" and is obtained from within your Google Adwords account. This tracking number is different from that which is provided to you through the use of Google Analytics alone.
Your conversion rate is a measure of unique visitors to completed actions on your website. Alone it will not guarantee you make money from your efforts, but combined with the remaining elements outlined below, it is one of the key metrics toward running a successful paid search campaign.
2) Know Your Value per Visitor.
Your Value per Visitor is the revenue you generate from each pay-per-click visitor to your website. In other words, it is a measure of how effective your website generates sales from the visitors it receives. The higher your value per visitor, the more effective your website is at converting them into sales.
You calculate your value per visitor using the following formula:
Revenue Generated / Total Number of Visitors (Sessions)
Value per visitor can be confusing for many. Take for example a site with a value per visitor of $.95. Given this measurement we could accurately say that the site owner makes 95 cents for every visitor who arrives at their website. It gets confusing for some because they ask, "How can I make $.95 for each visitor when not every visitor buys from me?"
The answer is found in the way the metric is perceived. It shouldn't be looked at as each visitor actually completing a "transaction" with your site, but rather each visitor being worth an amount that ideally should be less than your CPC (cost per click).
To further illustrate, if your Average CPC was $1.25 and your value per visitor is just $.95 then you are losing $.30 for each visitor you drive to your website. In other words, you spend on average of $1.25 to get one click that is only worth $.95 to you. At this rate you will never profit and should consider reworking your paid search campaign, hiring an expert PPC Marketer, or shutting it down until you can do one of those options.
3) Keep your Average Cost per Conversion in check.
Your Average Cost per Conversion (sometimes called Cost per Action) is the average amount of funding it takes to generate one action (a sale in the case of ecommerce sites.)
It is calculated using the following formula:
Advertising Cost / Total Completed Actions
In its simplest form, your average cost per conversion should be lower than your average order value or you are losing money. To illustrate, if your average order value is $35 and your average cost per conversion is $40 then you lose $5 each time a sale is completed on your site. In other words, you are spending $5 more in advertising than you are receiving from a sale. This one can be hard for many to see as they look at only the end result - the completed sale. They neglect the advertising cost which went into achieving that sale and therefore often end up continuing to run paid search campaigns which are not profitable to their business.
The exception to the rule is a company who has built in average lifetime value of a customer and is willing to lose money or break even on the first sale in order to gain future sales from that same customer. With careful planning and proper implementation, this strategy can successfully be used to build a viable business online.
4) Use long tailed keywords and exact match instead of shorter more generalized keywords and broad match.
When Internet users begin their search for more information on a product or service, they often use what are called general or broad keywords. They do not know exactly what they are searching for but do know they need more information on a given item of interest. As a result, the keywords tend to be shorter and more general.
Searches result in terms like "shoes," "running shoes" and "nike," for example. While these terms would likely return data relating to a given product type, they would likely not return data on a specific shoe. These terms would yield traffic on a broad level with all visitors looking for information yet few looking to buy. Not only would these search terms yield broad scale traffic, but they would come at a high price. Often times the more broad the keyword is, the more competition there is for it and the higher CPC you will pay.
Consider now the user that has already done their research and is ready to buy. They have performed all the searches, learned what is the best running shoe for their needs, and are now on the hunt to find out where they can get it. As the user narrows their search and has gathered more data about a given product their search shifts to a more exact methodology. They begin to use what are called long tailed keywords to find more specific results, with terms like "nike airmax running shoe," or "nike airmax size 7 running shoe," used.
You can see just by looking at the search terms utilized that this user is more qualified to buy. They know exactly what they want and now they want to know where to get it.
Although there will be competition for these keyword types, it is likely to be less than at the broad level. As a result, you'll achieve lower CPC prices and in turn more qualified traffic by bidding on these types of "long tailed" terms.
Running a profitable paid search campaign often takes a more hands-on approach. The theory of "set it and let it" will end up costing you dearly in the end, with less than desirable results. Giving the complex nature of paid search, you can give yourself a better chance at success by simply using more exact keyword phrases and focusing on these three metrics:
Value per Visitor
Average Cost per Conversion.
They are at the heart of every profitable paid search advertising campaign and should be at the heart of yours.
Eric Leuenberger is an ecommerce conversion expert and author of a leading Ecommerce Optimization blog (www.zencartoptimization.com). He coaches etailers, wholesalers, distributors and manufacturers to increase their website sales through online paid search advertising, targeted marketing strategies and website sales strategies. Contact him at 1-877-481-2323.
Topic: Business Strategies
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