The biggest mistake businesses make in digital marketing is focusing on activities rather than outcomes. We often hear from marketing teams who have lots of exciting activities to try, but who haven’t done any forecasting and therefore have no idea what the results will be.
The most successful digital marketing campaigns begin with the end in mind. Accurate forecasting is paramount. It reduces risk when launching new digital marketing campaigns, eliminates wasted media spend and troubleshoots unprofitable campaigns that have been allowed to run for some time.
The three most important numbers you should be concerned with to ensure a successful digital marketing campaign are:
1. Cost per Acquisition (CPA)
2. Cost per Click (CPC)
3. Conversion Rate Required (CRR)
1. What is Cost per Acquisition and why does it matter?
Cost per Acquisition – also known as Cost per Action or CPA – refers to how much money you are willing to spend on your marketing in order to get one paying customer. This number is the bedrock of all your sales and marketing activities.
If you don’t know how much money you need to spend to get one new customer, you can’t determine what is viable for acquiring that customer and what is not. This number is way more important for determining the success of your digital marketing than how many people clicked or viewed one of your adverts.
There’s no industry standard or benchmark for calculating your CPA as it depends on your business’s average revenue per customer. There are many ways to determine your average revenue per customer, but a good starting point is to take your total revenue over a period (year/month) and divide by the number of customers you had during that period.
Average Revenue per Customer = Yearly Revenue / Yearly Customer Count
Once you know how much an average customer is worth, you can calculate what your average profit is. At this point, you can decide how much of your net profit to put towards your CPA. It varies a lot depending on industry but a typical amount is 30%. One important thing to bear in mind is Life Time Value. If you take repeat purchases into account your CPA will be higher. To get a true CPA I suggest you calculate the CPA on one sale of an average customer and then multiple it by the average number of times a customer buys.
2. What is Cost per Click (CPC) and how does it relate to CPA?
Your Cost per Click, or CPC, is how much it costs you to get someone from your target audience into your website.
What this number is will vary depending on the channel. For example, with paid advertising someone from Facebook might cost £0.50; LinkedIn might cost £2.50; Google AdWords could cost anywhere from £0.06 to £200 depending on how many people are competing for your target keywords.
How much your CPA is will determine which channel is the most viable for sending traffic to your website. For example, if you want to pay £100 for a sale through your website, and the CPC of a Google Ad to send someone interested in your products is £1, you need at least 1% of visitors to become customers.
If it were £20 per click, you would need 1 in 5 visitors to buy. Using your CPA and CPC in this way shows whether a digital marketing campaign will deliver a return on your investment. In this example, you can see that it is unlikely to deliver a return, is therefore high risk and should probably not be pursued.
The above examples refer to paid advertising but you can also apply these numbers to SEO, content marketing or social media. To get any real volume of traffic through these activities you still need to be paying someone (or yourself) to do work that will drive the extra visitors. You can work out your CPC for SEO or social by dividing the cost of your time or someone else’s by the number of clicks.
This figure often comes as a shock to most people and makes them question whether they are investing too much in SEO or social media.
One way to see if the CPC for SEO is reasonable is to compare it to the cost of a paid ad. For example, one of our clients wanted to rank number one in Google for a particular search term. They were paying £0.25 per click in AdWords for their target keywords.
Using organic SEO, we estimated that it would cost them £10,000 to get them there. The additional traffic it would bring was 100,000 more visitors for a keyword that was proven to convert really well. This worked out at £0.10 per click, way below the £0.25 they were paying for AdWords.
This proved that there was a business case so we went ahead with the SEO and that client is now enjoying the benefits of being number one organically and running Google Ads.
In summary: Knowing your CPC, whether it’s through paid advertising or organic activity is essential for forecasting the success of a campaign and minimising risk.
What is Conversion Rate Required (CRR)?
Your conversion rate is the percentage of people who arrive at your website and complete a desired action.
If you are an ecommerce business, this is the number of people who go through to check-out and buy from you, but a conversion could also be the number of people who complete a contact form or download a report. What counts as a conversion for your business will be dependent on your KPI’s.
By working out the CRR, you can quickly see whether a campaign is likely to work. What good looks like will depend on your business and your sector. As a general rule the online average is 2%, e-commerce 0.5-4%, a standard brochure website is 1-6% and for an online quote or information 5-35%. Therefore, if the CPC is £15 and the CPA is £150 then the CRR is 10%. If your landing page converts well this is achievable.
I’ve seen businesses lose thousands by not making this calculation. We once received a phone call from a small business owner who had invested £30,000 in an e-commerce business. He’d used two digital marketing agencies over the last 12 months but was losing money. Further investigation revealed that his CPA was £5.00 with a CPC through AdWords of £1.72. His conversion rate was 34.4% meaning he needed 1 in 3 visitors to his website to buy, which meant his campaign wasn’t viable.
How to use CPA, CPC and CRR
Using these three numbers together will help you determine what you need to do to make your campaign profitable. Not only does it help you decide whether a campaign is viable, but you can also use them to troubleshoot existing campaigns that are off target. You may find that you need to lower your CPC or carry out some optimisation work on your website to increase your conversion rate. Or, you may discover that some aspects of your marketing simply don’t deliver a return on your investment and should be ditched.
Your ultimate aim is to keep increasing the number of new customers each month while lowering the overall cost. These three numbers give you the framework to do this.
So, when your marketing team brings you a new campaign, make sure they have established the Cost per Acquisition, calculated the Cost per Click and worked out the Conversion Rate Required.
10 January 2018
By Rachel Murray