This is a guest post by Phil Frost, Co-Founder of Main Street ROI
I had a frustrating call the other day with a private client when we were reviewing his advertising campaign. He was venting about the high cost per click for various keywords and suggesting we remove keywords solely because the cost was too high. Similarly, he was suggesting we focus more of our budget on cheaper keywords where we would get “more bang for our buck.”
In one example, he showed me a keyword that was $11 per click versus another keyword that was only $2.98 per click. The $11 per click keyword was generating only half as much traffic as the $2.98 per click keyword, so my client wanted to stop advertising on the more expensive keyword.
His thought process was pretty straight forward: Stop advertising on the $11 per click keyword and focus more of the budget to the $2.98 per click keyword. That way we’ll generate more traffic and spend less money.
But this type of thinking is completely WRONG! Costs alone do not tell you anything about ad performance or return on investment (ROI).
Looking at costs alone is like comparing two investment options and picking the one that requires less capital, despite the projected ROI. That doesn’t make much sense in investing, yet that’s how many business owners try to manage their ad campaigns.
Here’s an important tip: there’s usually a very good reason why certain keywords and websites cost less in advertising. In most cases this is a telltale sign the traffic does not convert to sales. If the traffic did convert prospects to sales, then more advertisers would bid on the keyword and drive the cost up. It’s as simple as that.
So lesson #1 here is all traffic is not equal. Therefore, the cost per visitor is not a good metric to use when optimizing your ad campaigns. The cost is only half of the equation. The other half is sales conversions.
This brings us to lesson #2 – you must track conversions to optimize your ad campaigns. A conversion should be a sale if you can measure it accurately, but it can also be a warm prospect in the form of a phone call, in-person visit, or online webform submission.
With conversion tracking in place, you can calculate your cost per conversion (also known as cost per action, or CPA), which is really the only way to judge your advertising campaigns.
Let’s look at our previous example again to see how this works in practice. I explained to my client the $11 per click keyword was converting 20% of the visitors to warm leads via an online application. That means the cost per conversion was $55. The $2.98 per click keyword was only converting 5% of the visitors to warm leads so the cost per lead was $57. Therefore, both keywords were generating leads for about the same cost. In fact, the higher cost per click keyword was generating leads for LESS money. Yet, my client was about to turn off those keywords just because the cost per keyword was higher!
See how the cost per keyword data alone is misleading? At the end of the day, your goal with advertising is to profitably generate leads and sales. The only way to measure the effectiveness of your ads is to compare the cost per lead or sale versus the revenue per lead or sale. Those are the two critical metrics.
My example here was for online advertising, but this is relevant for every type of advertising you run in your business. All media must be compared and optimized by looking at cost per sale or cost per lead. The cost per website visitor, cost per radio airtime, cost per TV placement, cost per letter mailed, or any other cost alone tells you very little about the campaign. Make sure you have a system to track sales and/or leads directly from the ad campaign using tracking phone numbers, unique coupon codes, or any other method. Then, calculate the cost per conversion to make smart, educated decisions to optimize your campaigns.
About the Author
Phil Frost is the co-founder of Main Street ROI and a Google AdWords certified professional. Want more online advertising tips? Get your copy of Phil’s FREE report: 10 Steps to Dominate Google AdWords