Calculating Your Cost-Per-Click

The Pay-Per-Click (PPC) online marketing method has a sales component called the Cost-Per-Click (CPC). The CPC is exactly what it says it is in that it is the cost the advertiser pays for every click they receive during a PPC campaign. Determining the CPC is extremely important because it will help the advertiser determine what their return is on their marketing investment, and it will also help the advertiser to use more accurate cost figures for future campaigns.

Determine What Kind Of Return You Want

How many dollars in revenue do you want to generate for every marketing dollar you spend? To answer this question, you have to either really know your marketing numbers or be a digital marketing expert. In the world of marketing, making four dollars for every marketing dollar you spend is a high return. Since we are being optimistic in this piece, let's use the 25 percent return on investment to figure our CPC.

Using Your Conversion Rate

Before you can accurately calculate your CPC, you need to have a run of sales figures in front of you to analyze. You need to know things like the cost of the product you want to sell and how many online customers your sales team has to talk to before getting a sale (conversion rate). If you have a $1,000 product and it takes 100 leads to generate an online sale, that gives you a one percent conversion rate.

Your return on investment indicates that you want to spend $250 to make a $1,000 sale for this item. If your conversion rate is one percent, then you need to spend $2.50 per click to make a $1,000 sale. The formula you can use would be:

(Product Sale Price X Online Sales Conversion Rate) X Return on Investment Ratio = CPC

CPC For Generating Leads

The CPC formula we just provided is ideal for online retailers who sell to end users, but that is not the only use for a PPC campaign. Many businesses use PPC advertising to generate quality leads that their sales people can use to close deals in business-to-business situations. A large majority of these sales happen offline, which means that every lead generated by a PPC campaign needs to be as qualified as possible.

This formula gets a bit more complicated, but it is not that hard to follow. You have to multiply the amount of revenue generated for each sale, by the percentage at which your link clicks turn into leads, by the closing percentage for your sales team. Then you multiple that number by your return on investment. It would look like this:

(Item Sale Price X Lead Conversion Ratio X Sales Department Closing Ratio) X Return On Investment = CPC

If you are selling a $250 item and you are converting two percent of your clicks into leads for a sales department that closes 30 percent of its leads, your CPC would be approximately $.04 (using the 25 percent return on investment from earlier).

The difficult part with PPC advertising is that you have to try and outbid other advertisers for prime space on a page or placement in a banner. Unfortunately, that variable cannot be expressed in these formulas because you never know what someone else will bid. But at least you will know the CPC you need to use to reach your goals and maintain your profit margins.

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