Before starting AdWords advertising, there are metrics that a small business owner must know. The best AdWords strategy is the one that is most likely to achieve the net return the business needs, not just drive profitable sales. To drive traffic from paid search profitability – you need to identify these key metrics and benchmarks for your business.
Establishing Your Goals and Benchmarks
These goals should be goals to get your company to profitability. To do this you must define and know these metrics: CPA, CPC, Conversion Rate for positive ad spending, and Customer Lifetime Value (CLV). How do we find them?
How to Define a Profitable CPA (Cost-per-Acquisition)
Net margin on sales to get the closest estimate to your profit per sale and then multiply that by your average order value, thus getting your CPA. Then you will know how much you can spend per conversion on your website in order to remain profitable.
Net margin (%) x AOV ($) = CPA ($)
How to get Average CPC (Cost-per-Click) for Keywords
Use AdWord’s Keyword Planner to take their estimated CPCs and then buffer that within a range that is reasonable for your business. This is not an exact process but rather an estimation.
How to Find Conversion Rate Needed to Achieve Positive Return on Ad Spending
This process could be a little tricky. First, you need to know CPA and CPC. You then pair CPA with average CPC to figure out a minimum required conversion rate to profit on your ad spend. Since CPC is controllable, you can adjust numbers into this equation. However – this results in a massive range so it is important to look at CPA and CPC in context to your conversion rate in order to assess whether your conversion rate is good. Remember – conversion rates do not exist in a vacuum and comparing conversion rate to other businesses never guarantee profitability.
How to measure Customer Lifetime Value (CLV)
Your CLV helps put a more flexible acquisition cap on your ad spend. CLV = TOTAL company revenue divided by TOTAL number of customer. A long term campaign should hit CPA. A short term campaign should at least hit your CLV to be considered a success.