How Do You Know if Your PPC Advertising is Cost-Effective?

Traditional media marketing relies on results, but often where specifically sales are coming from. Knowing if your budget is being spent efficiently, can be sort of a guess. One of the great things about digital marketing, specifically PPC Advertising, is the ability to quantify and analyze the effectiveness of your marketing budget. But how exactly do you do that? How can you determine if your marketing is profitable? 

The good news is that it’s easy with a few key pieces of information. With pay-per-click advertising, you can see how much each lead or sale costs. With a little math, you can also determine the profitability and adjust as needed. 

In this blog, we will go over the basic tools and formulas you need to assess your campaigns.  We will also define the main acronyms you will often hear and how they are calculated.

Essential Resources for Effective PPC Advertising Management

To evaluate your search marketing campaign you will need access to your Google Ads or Microsoft Advertising account. Having access to Google Analytics is also valuable for seeing how users interact with your site. Analytics will also help when evaluating the conversion optimization of your pages. If you’d prefer not to dig into these, or aren’t sure where to start, your search marketing professional can provide the Key Performance Indicators (KPIs) and help you meet your goals.

Cost Per Acquisition

One of the basic pieces of info you will need is your CPA (cost per acquisition). This is generally the cost of getting someone into your marketing funnel or in the case of an e-commerce site the cost of getting a sale. This can be calculated by dividing your media spend by the number of leads or sales it has generated in a specific period.  Basically spend over conversion. CPA is also a primary performance indicator for your overall campaign. 

If you can maintain or lower your CPA while scaling up your overall account and ad spend that is an indicator that there is room for profitable growth in your PPC advertising campaign.

CPA = Cost/Number of Conversions

Gross Profit

How much an acquisition costs only gives you half the picture, the next thing you need to determine is the gross profit from a transaction. Generally, this is determined by taking the cost of a sale and subtracting the cost of producing the good or service. For example, if a widget costs $50 to produce (materials and labor) and sells for $100.00 the gross profit is $50.

Gross Profit = Sale Price – Cost to Produce

Profitability for Ecommerce

With this value and your CPA, you can make a simple evaluation of whether you are spending more on a sale than you are making from it. For an e-commerce conversion if the cost per acquisition is less than the Gross profit this would be a profitable marketing expense.

CPA < Gross Profit

Profitability for Lead Generation

What if you aren’t counting an e-commerce transaction as your acquisition for your PPC advertising? What if you are counting a lead as your acquisition and are focused on getting clients into your marketing funnel? How do you know if your cost per lead is profitable? You can do this with just a little more information. All you need to add to the equation is the close rate of leads. To do this calculate what percentage of leads are being closed as sales.

Close Rate = Sales/Leads

Divide your close rate by 100 to get the multiplier you need to use on your CPA to determine cost-per-sale. For example, if your cost per acquisition is $50 and your close rate is 20% you would multiply your CPA by 5 (100/20) to get the cost per sale, which in this case would be $250.00 ($50 x 5). If your gross profit is less than the cost per sale your marketing is cost-effective. 

 Cost Per Sale < Gross Profit = Profitable Exchange

Putting It Together

Tracking cost-per-lead and cost-per-acquisition in search marketing are not mutually exclusive. If your website allows direct sales and lead acquisition you may want to monitor the cost per lead and cost per online sale and assign a target value to both to monitor your sales funnel at different points. This allows you to determine how cost-effective your campaign and website are at nurturing and generating sales and where to spend your time and energy most effectively. This can also be extended to newsletter signups, social media activity, and other trackable activities. Other activities that can nurture sales include maintain customer loyalty and promote word-of-mouth advertising.

Moving Forward 

Now obviously you want to maximize profit so once you have this dialed in you can start optimizing your account and improve that margin. This will require your PPC advertising and design teams to coordinate on optimizing your campaigns and website. Better yet have us do it for you!