PPC managers have different targets for their clients. One of the most common targets is to manage the campaigns based on an average maximum cost per conversion (CPA).
What many clients –and PPC managers- don’t know or don’t realize is what the true cost of the extra conversions is. Even if the average CPA is below the maximum allowed CPA, the last conversions might be too expensive and maybe even leading to a loss for the client.
Lets have a look at an example.
Example – the calculator shop
Assume you are managing the account of an e-commerce store that sells calculators. They sell for $25. The profit on a sale is $15, with just the ad spend to subtract from the profit.
You are currently managing the campaign and you get 100 conversions for a total cost of $1,000. This leads to a CPA of $10. The profit for the client is $500.
The client however told you the CPA could be $11 if he gets more conversions as the $11 is still well within his profit margin of $15. As a good PPC manager you started pushing the best keywords and magically knew to push 20% extra conversions until you reached an average CPA of $11. So you now have 120 conversions for a total cost of $1,320.
You are happy, the client is happy and you live long and happily ever after. But should the client be that happy?
If we have a closer look at the details of the additional conversions:
- 20 extra conversions
- $320 extra budget
This leads to a CPA of $16 of the additional conversion! He actually lost money on the additional conversions. The profit is now $480.
A visual representation of the CPA’s and profit margin
So are those additional conversions bad?
Not per definition as it depends on the goal of the client and other factors that we sometimes don’t know as PPC manager (profit margins, life time value of a client, branding value, increase of the market share etc). It’s important that both you and the client are aware of the price of the additional conversions.
About the author
Rick Vugts is the co-founder of Visible Online Marketing. Intrigued by both the psychological and marketing and the statistical side of PPC marketing.
Hi Rick –
A very good point – bidding for more clicks doesn’t necessarily mean the cost per conversion / sale will be as good.
09.23.13 at 2:21 am
the only problem with splitting ad groups regularly is that you sometimes lose high quality scores on certain keywords
09.23.13 at 5:39 pm
I would first take issue with the gross profit at $15. I appreciate this is an example but to be realistic it is more likely that the GP would be 30% to 40%. Therefore the margin would realistically be around $8.75.
It not unusual to see advertisers spend upto a third of the available GP. So the real conversion should about $2.65.
Too often agencies miss understand GP and economics of Adwords.
05.17.14 at 12:07 pm
High Conversion doesn’t mean much for a client if the CPA contribute to a lower ROI.
In the end, ROI is what matter the most to the client.
06.03.14 at 3:23 am
the only problem with splitting ad groups regularly is that you sometimes lose high quality scores on certain keywords.
08.31.14 at 5:42 pm
I think its quite a common thing to grade your campaigns and make decisions around a given maximum cost per conversion, especially in the ecommerce environment. It helps make sure that advertisers are seeing a decent level of ROI from their campaigns.
All too often with new clients especially ive found that they dont get a grasp of CPA or cost per conversion and when you look at their campaign you can quickly see that they are burning through money, more often than not just because they dont understand the adwords interface or how to use the system.
Great post.
Andy
09.26.14 at 5:28 pm
A Good Revelation Aaron,
Thanks
10.08.14 at 9:28 am
A very good post. the Only problem with splitting ad groups regularly is that sometimes you lose high quality scores on certain keywords
11.12.14 at 3:30 am
Nice work, I always make sure the client knows not only the cost of additional conversions but what it means for us and them long term!
12.01.14 at 7:36 am
Good point on your post Aaron. Looking forward for more of these in the future.
05.21.15 at 1:25 pm
Great read. I myself have never been a fan of a CPA bidding strategy and with the example you gave I can see why.
06.17.15 at 9:38 am
Hey Rick,
Most of my clients overlook a lot of this stuff….
A few others are agencies that charge clients to bid on their brand term. I’ve seen this time and time again.
Another is everyone getting excited about how retargeting works so well and PPC is a waste of time. What they don’t realize is they never would had been able to retarget to them in the first place if they weren’t sending traffic to their site…
03.01.17 at 3:01 pm