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Terry Howard Orlando, Florida |
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Some Advertising Fundamentals |
Posted by Terry Howard @ 11/16/2007 
CPC = Cost-Per-Click
CPA = Cost-Per-Acquisition (we call this CPL, Cost-Per-Lead, for our purposes, in any case it's the cost per "conversion", but CPC is already taken!)
CPC is just the average paid for traffic, or clicks on your ad, irregardless of what they do after that
CPA/CPL is a measure of how much you had to pay before you get a lead or sale (on the average)
The conversion rate of your CPC gives you a CPL. So like say you are bidding $1.00 for a term. That term got clicked 100 times and it just happened to be $1.00 everytime (for arguments sake). The average CPC was $1, but your overall spend was $100. Let’s say 5 out of those 100 clicks bought something. You had a conversion rate of 5%, and your CPA was $100 (your overall spend) divided by 5 (your total orders), which gives you a CPA of $20. You literally had to pay $20 (averaged) to gain 5 orders.
Your ROI now is something you can only really determine in short order for immediate sales type conversions. Leads could in theory be quantified as an ROI but we’d have to take our average revenue generated by a successfully cultivated lead, divide that by the conversion rate of our leads (how many leads become customers) and get an average value for each lead. We could then use that as our “conversion value” in an ROI equation, which is:
ROI = net revenue / costs x 100%
So in our above example you have 5 orders (or leads), let’s say they were for $400 a piece (or for every 5 leads 1 will become a customer that nets $2000, making your average lead value $400) . Those 5 orders/leads brought in $2000. Now we spent $100 to earn that $2000, so our net revenue from the campaign was $1900 (gross – costs). Now take that net, divide it by the cost again, which gives you 19, which means your campaign was effective by a factor of 19, or more commonly represented as a percentage (x100%) which gives you an ROI of 1900%.
You could then take that number and use it for projections. Given all factors the same we might could expect that plugging in $2000 at a ROI of 1900% would yield $38,000 ($2000 x 1900%.)
Labels: advertising, marketing, search engines