PPC (pay per click) advertising is a highly targeted marketing tool that's incredibly effective. However you need to understand what works for you. Thankfully there are certain metrics you need to track, as well as formulas you need to know in order to calculate the true value of your PPC efforts. The two most important formulas you need are Cost Per Click and Return On Investment. There are two related formulas that will give you a better understanding of your pay per click performance.
Two Formulas That Will Help You Understand Your PPC Data
Granted there are other PPC formulas out there too. Like click-through rate, conversion rate, cost per thousand impressions, and cost per acquisition. All of these will give you the most essential data in order to assess your PPC efforts and modify your campaigns in order to get the best results. Below we'll cover two formulas that can help you with your PPC campaigns.
The general idea about PPC is that it gives you the opportunity to reach targeted audiences quickly by specifying who will see your ads. Either by entering specific keywords or demographic characteristics. The good thing is that you only pay when someone clicks on your ad.
1. Cost Per Click
This is definitely one of the most important calculations when it comes to your pay per click campaign. Cost per click will help you determine the exact cost of every click. Here's the simple formula:
Total Cost / Number of Clicks
For example, if you spent $250 on the entire campaign and generated 200 clicks, your cost per click would be $1.25. This is quite low compared to the average CPC of $2.14. This means, that each of those new (possible) leads will only cost you $1.25.
Related Formula #1: Cost per thousand impressions
The cost per thousand impressions (CPM, or cost per mile) is similar to CPC. The main difference is that it deals in terms of thousands. It also concerns itself with the number of people who see your ad versus the number who clicks on it. The goal is to figure out how many people see your ad (each view is an impression) and how much it costs to increase your visibility. In order to determine the CPM, use the following formula:
(Total Cost / Number of Clicks) x 1,000
Using the example of where you spent $250 on the whole campaign, let's say the ad was seen by 9,000 people. In that cases, your CPM would be $27.77. This is slightly higher than the average of $24.74
Related Formula: Click-Through Rate
The click-through rate acts as a bridge between your CPC and CPM. The CTR lets you know how many people see the ad versus how many actually click. You can then calculate it with the following formula:
(Number of Clicks / Number of Impressions) x 100
So, if you spend $25o on a campaign that generated 9,000 impressions and 200 clicks, your click-through rate is 2.2 percent. CTR is an excellent metric because it tells you if your ad is effective or not. If your click-through rate is lower than the average 1.16 percent, then you should try A/B testing. The different elements will help you see where and how the ad can be improved to increase performance.
2. Return On Investment
CPC and CPM are pretty significant numbers to keep in mind. Especially when you need to figure out the cost of your leads. In fact, return on investment (ROI) is actually the most important. ROI is a crucial part because it doesn't just look at the cost. It also takes a look at what you're getting out of the campaign. This gives you tangible number-based data about the benefits of your PPC efforts and tells you how many sales are generated from the campaign.
You also need to make sure to compare you the ROI of different efforts because it will give you insight. Like which campaigns are actually performing by bringing in leads, driving conversions, and increasing sales. Here's the formula to calculate ROI:
(Revenue Generated - Cost of Campaign) / Cost of Campaign) x 100
So that $250 campaign generated 200 clicks which resulted in $275 in sales, then your ROI would be 10 percent.
The only issue you might come across is that you can't always easily trace each sale back to the campaign. For example, if a customer saw your PPC ad, clicked on it, checked out your website, but then called to order instead of buying online. Whenever you look at your online analytics, you wouldn't see that the sale was related to the PPC campaign. These would really skew your ROI calculations.
The best way to calculate ROI for PPC, you need to take some other steps. One of the best ways to use call tracking. You can do this by using different phone numbers on different landing pages based on the keyword. This way you can properly track the call sales.
Related formula: Conversion Rate
The conversion rate formula is the rate of leads that end up converting after clicking through. Therefore it's important to remember that while conversions often refer to sales, it can actually apply to any action you're trying to get a prospect to engage in. For example, a conversion could be anything from someone downloading an e-book, signing up for your e-letter, or filling out a contact form. In each case, the formula for calculating conversions is the same:
(Number of Conversions / Number of Clicks) x 100
Going back to the campaign that generated 200 clicks and eight conversions, giving you a conversion rate of 4 perfect. This is actually high because the average conversion rate among marketers using AdWords is 2.7 percent.
Since the conversion rate is such an important part of the PPC metrics, you need to set up conversion tracking with each campaign you run. However, it's important that you track ALL conversions. Including ones that were placed on the phone. So if you want the most accurate details about PPC efforts, this is the way to go.
Why is conversion tracking so important?
Conversion tracking is important because it gives you an idea of how effective your campaigns actually are. In the end, PPC isn't just to get people to click, but also to buy. So if a campaign generates clicks, but no conversions, then it's just not performing OR there's a problem with your landing page or sales funnel. If you find there's an issue with your conversion rates, then you need to go back to your analytics to see where visitors are leaving. This is the best way to identify the problem.
You could retarget those who leave with a survey email as a way to request information about why they didn't convert.
Related formula: Cost Per Acquisition
Cost per acquisition (also known as CPA or cost per conversion) is a more in-depth version of the cost per click calculation. And since it goes beyond basic clicks in order to find out the cost of each conversion that you've achieved. This is important because even though your campaign might have generated 200 clicks, it's possible that only 8 leads actually converted. This is why you need to consider BOTH metrics. Here's how to calculate CPA:
PPC Campaign Cost / Number of Conversions
Let's say that your $250 campaign generated eight conversions. Each acquisition would cost $31.25, which is close to the $33 average. Your CPA will help you determine the success of your bidding strategy. It even tells you exactly how much it costs to acquire a new customer.
Two of the most important metrics to focus on when analyzing a PPC ad are cost per click and return on investment.
Just keep in mind that within those categories, there are other formulas you can use to generate crucial calculations about your efforts. ROI and conversion rates are two of the most important metrics to pay attention to with PPC. But there are a number of different factors you should consider. Especially if you want to see the whole picture.
Another important thing is what you do with your data. So unless you plan to change your campaigns with the goal of improving them, there's no point in collecting the data in the first place. Just keep in mind that you need to use these formulas to get information and then change or tweak your PPC efforts in order to achieve the type of performance and ROI you're looking for.
Don't Forget To Measure Your Investment
Before you really start to see the results, you need to put some work in. That could be managing outsourced writers, promoting your content via social ads, or writing your own content. You also need to take a look at all of the funds you're using to make your campaign a success. So if you're working with an external agency, the cost will be a straightforward cost for all aspects of the campaign. This includes content, SEO, and social ads.