Cost Effective Marketing

Do you know how cost effective your marketing is?  In good times and bad it makes sense to know your cost per conversion. Without it, you’re basically spending money in the dark.  This is particularly true in a difficult financial climate when people can be tempted to cut budgets willy-nilly because cash flow is poor.  But knowing what works and what doesn’t allows you to make informed decisions about what campaigns to adjust.

As far as internet marketing is concerned you need to know where your leads come from and secondly work out how much you are paying per lead.  It’s not unusual for companies to erode profit margins by spending more than they can afford to get leads.

Pay Per Click Example

Take Pay Per Click (PPC) advertising such as Google’s Adwords as an example.  How much can you afford to bid to get a customer?  This figure is sometimes referred to as the Allowable Cost Per Conversion. It’s not specific to PPC – you could use it for all your channels – but for the purposes of my example we’ll stick with PPC.

First we need to work out the cost of a conversion. To calculate it, take the Total Advertising Cost (such as your daily Adwords Budget) divided by the Number of Conversions as shown below.

Cost Per Conversion   = Total Advertising Cost / Number of Conversions

There are a couple of things you should note about this:

Cost Per Conversion is not the same thing as Cost Per Click. Simply stated, not all clicks convert to leads. A second thing to note is that conversion rates vary by sector. You may never know what other people in your industry are spending but it’s worth asking your internet marketing consultant for their views.

Working Out Allowable Cost Per Conversion

What you can calculate is whether what you’re paying is affordable for you. Or put another way, how much you can reasonably allow yourself to spend to get a conversion.

Companies offering services and those selling products face different challenges when working out what they can afford to spend to get a customer (conversion).

Product based companies can use an average sales value per order. Then costs need to be deducted from the value of an order including direct costs and overheads. From the resulting profit figure you apportion a % to Allowable Advertising Spend. Divide that by your conversation % to get the final allowable bid.

For a service based company the calculation is somewhat different.  Suppose the goal is download a brochure. You need to make an assumption about what % of people who download it become customers.  If you feel 5% become customers and your average sale is £200 then your allowable cost per conversation would be £10.