educational

How Much Should You Pay for a Click? Part 1

Andy Quick

You have a web site ready for action. Your products, order tracking, credit card payment system, and fulfillment process are all in place. Now all you need is traffic! Many web entrepreneurs have learned that the magic nut to crack is attraction: get a steady flow of customers who explore your site and eventually purchase goods.

The overhead costs of most web businesses are minimal relative to brick and mortar stores. However, the variable marketing costs can over shadow sales revenues by orders of magnitudes. Unfortunately, unlike the saying in the movie Field of Dreams, “If you build it, they will not come!” Luckily, the industry has learned this lesson; some the hard way, and others in spite of the losers. Dot-coms are clearly not the darlings of the capital markets any longer; however, there is still money to be made!

If you plan to start a web business or already have one but are not sure how to increase traffic and make money at the same time, you should consider a science-driven approach.

How to Lose $500 in 12 Hours
One weekend, my business partner and I created an affiliate commerce site. The site comprised a list of links to other online retailers. People go to our site, pick a link to a jewelry store for example, buy something, and in turn we receive a commission from the sale. The process of creating the site, signing up the affiliate agreements, and turning it on was a cinch. The cost was virtually nothing. We, being new to this whole web business concept, thought we had an incredibly smart marketing idea: pay to have our site come up in an ad box on a major search engine (Google) every time someone searched on the word “gifts”. The word gifts is searched for 49,000 times per day! We figured we would have a good flow of visitors and the money would start rolling in. For certain, we would at least break even. We sunk $500 in one day and let it rip. Here’s what happened:

  • Our investment in Google - $ 500
  • Number of times our ad was displayed (impressions) - 36,964
  • Number of times people actually clicked on our ad when they saw it (click-throughs) - 429
  • Number of times a person visiting our site made a purchase - 10
  • Our total sales revenue - $ 77
  • Our total gross profit - $ (428)

The whole process took less than 12 hours. At least we learned a lesson quickly at a relatively low cost. Let’s look at this event from a slightly different perspective, putting the costs in terms of number of visitors:

  • Our investment in Google - $ 500
  • Number of times our ad was displayed (impressions) - 36,964
  • Number of times people actually clicked on our ad when they saw it (click-throughs) - 429
  • Ad cost per visitor - $ 1.17
  • Number of times a person visiting our site made a purchase - 10
  • Average sale per purchase - $ 7.70
  • Average revenue per visitor - $ 0.18
  • Average gross profit per visitor - $ (0.99)

We were basically giving $1 away for each visitor that came to the site. Not a winning business model. However, taking this information, we can assess which marketing techniques can work best for the business. Let’s add 2 additional critical data points to our table:

  • investment in Google - $ 500
  • Number of times our ad was displayed (impressions)- 36,964
  • Number of times people actually clicked on our ad when they saw it (click-throughs) - 429
  • Percentage people who clicked on our ad (click-through rate)- % 1.16
  • Ad cost per visitor - $ 1.17
  • Number of times a person visiting our site made a purchase - 10
  • Percentage of visitors who purchased something (conversion rate)-% 2.3
  • Average sale per purchase- $ 7.70
  • Average revenue per visitor- $ 0.18
  • Average gross profit per visitor- $ (0.99)

Running the Numbers
Putting this all together, you can create a formula for estimating the gross margin per visitor for a specific marketing campaign:

Average Gross Margin per Visitor = Average revenue per visitor - Advertising Cost per Visitor Advertising Cost per Visitor = Campaign Costs /(Impressions x Click-through rate)

Average revenue per visitor = Conversion rate x Average sale per purchase.

In Part 2, we'll put it all together and finalize our marketing model – stay tuned!

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