As I mentioned in the first part of this article, Pay-Per-Click is slanted toward the publisher, as it rewards the publisher early in the process while absolving him or her from responsibility for the later parts of the transaction. So if the advertiser is only interested in traffic, Pay-Per-Click works for both publisher and advertiser. If action (sale, signup, lead, etc) is desired, PPC isn’t necessarily a great deal for the advertiser.

I’m going to delve a little deeper into measuring the cost and success of pay-per-click programs for the advertiser, and introduce a few tools to help advertisers understand costs and benefits of pay-per-click advertising.

The process in Internet advertising goes something like this:

Impression -> Conversion -> Action

In other words, the prospect sees the ad (Impression), clicks on the ad (Conversion) , then something else happens (Action). That something else may simply be more traffic to the advertiser web site (meaning that the conversion is actually the action as well), or it may be a sale or signup.

There are three parties in every advertising transaction: the web surfer, the publisher and the advertiser. As a site owner or blogger you typically have transactions where you are the advertiser (driving traffic to your site and inducing an action), and transactions where you are the publisher (Google Adsense, affiliate programs or direct ad sales).

There’s a terrific article on visibilitygenie.com that discusses Profit by Impression, the idea of measuring the success of pay-per-click advertising based on different metrics.

Using some of their metrics and some of my own I’ve created a tool that will help you understand how much of each sale is going toward your PPC advertising, and I’ve segmented it by parts of the process. The tool is also available without all of this pontification here.

If you open the tool you will see three sections up at the top, with a button that says Calculate. The sections at the top correspond to the different links in the transaction chain, just like above.

In the top section (Impressions), you enter your budget (the amount of money you want to spend on keywords) and the average you want to spend on those keywords.

Under Conversion, you enter what you think the average clickthrough is going to be. I put 2% in there for you.

Under Action you need to enter the number of people you think will perform the action you want them to perform (sign up, buy something, etc) once they get to your website. Then you should enter the gross revenue and profit for that action.

Once that’s done, push the Calculate button. Here’s where the fun begins.

If you look at my example, this is someone with a $500 budget and .50 keywords. They expect a 2% clickthrough and a 2% action rate. Let’ s say they’re selling a Clickbank product and will make $30 on the $50 sale.

In the Results area we see how the campaign will play out. Their ad will be served 50000 times. 1000 people will click through to the website. Of those people, 20 will buy the product. That’s all in the first set of results.

The next set shows the profit after the ad campaign costs are considered. They will make $100 after getting back the $500 for the campaign. This translates into a $5 profit on each action (sale). There are other stats there too, but the per-sale one is the big one. There is an ROI of 20%, which isn’t bad.

Okay, so here’s where it gets interesting. What happens if you add $100 to the budget and pay for more clicks? Type 600 in the Budget square and push Calculate. You net an extra $20. which makes sense, since the amount of money you spend increases your clicks on a 1-to-1 basis (in other words, if you spend another $100 you get another 200 clickthroughs since you’re paying .50 for each one).

How about this one…let’s say you then rewrite your landing page so that you can squeeze .5% more action clickthroughs? Enter 2.5 in Action Conversion Rate. This gets you 6 more sales! Now your net profit after expenses is $300, and you’ve raised your ROI from 20% to 50%.

I played with this tool for hours while I was putting it together, and it was fascinating. Plug in your info and email me with anything interesting you can come up with. I am also taking requests for more tools.

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This entry was posted on Friday, February 24th, 2006 at 7:23 pm.
Filed under Affiliate Programs, Pay per click.
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