Talking About AdWords…
I talk to a lot of clients and prospective clients every week. I’m on the phone from sun up to sun down making deal, trading war stories, and keeping connections going. Just yesterday I got a call from a moving company owner in Kansas City who wanted to start advertising with me on Google AdWords. She had lots of questions about what she could expect from Rothman PPC and our AdWords results, and amazingly her main focus was on our standard moving company clickthrough rate (CTR) and what kind of clickthrough rate she could expect with our campaigns.
I was a bit taken aback by the question and her deep interest in CTR because the honest answer is that it really doesn’t matter that much to the overall campaign’s success. I answered her question and told her that it depended on the competitiveness of the individual market someone is in, the position we’re going for, and that it can range from 1% to 12%. We wrapped up the call shortly after that and she should be calling back soon to get started.
After the call I started thinking about her intense focus on CTR and the variety of questions that I get on my PPC Questions And Answers podcast. Between my podcast and phone calls throughout the week, I’m always talking about every AdWords topic under the sun, from CTR, to ad copy, to “single keyword ad groups.” But hardly anyone wants to talk about conversions and cost per conversion.
This is very concerning. Cost per conversion is not the only thing that matters in AdWords, but it’s like the main thing that matters in AdWords, and it’s severely under-focused on.
Why Cost Per Conversion Matters
Cost per conversion matters for lead generation AdWords campaigns because it is the metric that determines if your AdWords campaigns are profitable. To determine your profitability, take your average lifetime value of a new customer, and then subtract your cost per acquisition. Cost per acquisition is made up of your cost per conversion multiplied by how many conversions it actually takes you to acquire a new customer.
AdWords profitability = Average lifetime value of a new customer – cost per acquisition (cost per conversion x number of conversions it takes to acquire a new customer)
For example, let’s say a moving companies average moving job revenue is $850 and anytime they get a new customer that customer has some additional value beyond the first move because of additional moves they might hire the company for and moves they might bring in from word or mouth, so let’s add an additional 7% of value, so this makes the average lifetime value of a new moving customer $909.50, and we’ll round up to $910 [$850 revenue from the initial moving job on average + another 7% of value ($850 x .07 = $60)]. So the average lifetime value of a new moving customer is $910.
On the advertising cost side, let’s say the cost per click is $14, the conversion rate is 25%, so the cost per conversion is $56 (4 $14 clicks to get a conversion). And let’s say it takes 3 leads to get a new moving customer signed up for a move. So the cost per acquisition is $168 ($56 cost per conversion x 3 leads/conversions to sign up a customer) Now let’s go back to our AdWords profitability calculation.
AdWords profitability = $910 Average lifetime value of a new customer – $168 cost per acquisition ($56 cost per conversion x 3, the number of conversions it takes to acquire a new customer) = $742
In this example, every new customer acquired from AdWords brings in an AdWords profit of $742, and every $1 spent on AdWords brings in $5.41 in value ($910 average lifetime value / $168 cost per acquisition).
Hard But Worth It
With this example is should be clear how important cost per conversion is. If you know cost per conversion, if you know how many conversions it takes to acquire a new customer, and if you know what your average lifetime value of a customer is, then you can determine if AdWords is profitable and what cost per conversion number you need to hit to make AdWords profitable.
Knowing the cost per conversion number you need to hit in order to be profitable is the point where AdWords goes from a cool advertising platform to truly being magical. When you know your cost per conversion goal, you can then perform management on the account with that goal in mind and make sure that every ad you’re running performs profitably, that every keyword you’re running performs profitably, and that all the other decisions in AdWords like what devices to run on and what locations to run in are all made with profitability in mind. Knowing your cost per conversion number you need to hit is what allows for high-performing optimizations and management.
But it is kind of difficult to get all the information you need to be able to know the cost per conversion number you need to hit. You need to get all conversion tracking in place and track all three major kinds of leads. You need to have your conversion, cost per conversion, and conversion rate columns up and running in AdWords. You need to know the true lifetime of a new customer. And finally, you need to know how many conversions from AdWords that is takes to acquire a new customer. All of that is a lot to know and work out.
But as Forrest Griffin said once on the Ultimate Fighter, and what many people said before he said it, the juice is worth the squeeze. Understanding cost per conversion, focusing on it, and drilling down on AdWords profitability really pays off and helps you perform almost magic-like Google AdWords management and optimization.
Clickthrough rate, position, cost per click… all that stuff matters. But cost per conversion matters more.