Methods of Calculating Allowable Cost Per Conversion
One of the key components to PPC (pay-per-click) success is bid management and an essential part of bid management is knowing your Allowable Cost Per Conversion (ACPCon) or how much you can afford to spend to get a customer.
Cost per conversion (CPCon) is not the amount bid on an ad. CPCon is the number used to calculate how much to bid for a specific ad. In order to calculate the maximum allowable bid, the CPCon needs to be divided by the number of clicks it takes to achieve a conversion.
CPCon = Total Advertising Cost / # of Conversions
Allowable Cost Per Conversion for Tangible Products
If your site is an ecommerce site, calculating an allowable cost per conversion can be very easy:
Average order value - cost of product - overhead costs = Profit Margin
From this number you need to consider how much of your profit margin you wish to spend on acquiring an order.
This is the most basic way of factoring an ACPCon, which can then be used to calculate an appropriate bid for pay per click campaigns. But there are other things that you can consider to adjust that amount. These are:
- Lifetime value of a customer – Most likely, a certain amount of new customers that you gain through pay-per-click will become repeat customers. Take a look at your order history to see what percentage of new customers become repeat customers. Come up with an average lifetime value for a customer by averaging the amount of money each customer spends over the course of a year or two, rather than just each order. Consider calculating your ACPCon using lifetime value rather than per order value. Replace Average Order Value with Average Lifetime Order Value.
- Return visitors – Although a customer may come through your PPC ad, they may not purchase on that initial visit -- or even for months afterward. Look at your analytics to determine the return rate of visitors to your site and how long the average visitor takes to return. Apply that information to your ACPCon.
- Offline sales – Many online retailers also have offline sales. A certain percentage of people who visit your site will complete their purchase offline, either on the phone or in a brick and mortar location. If you feel this kind of behavior is happening with your customers, adjust your Average order value to accommodate that.
Example: Based on Average Sales Value
Average Sales Value = $100
Cost of Product = $50
Overhead = $10
Profit = $30
Allowable Advertising Spend = 25% of Profit, or ACPCon = $7.50
Order Conversion % = 5% of all clicks
Allowable Bid =
Cost Per Conversion for Service Based Products
Calculating CPCon for a company that sells a tangible product is relatively easy but, if your company offers a service rather than a finite product, calculating an ACPCon can be more difficult, but still not impossible.
First, decide on a goal or metric that you would consider an indication that a visitor is more interested in your service than another visitor. This metric could be downloading a white paper, filling out a form or simply going deeper into the site than the initial landing page.
From there, consider the following. How likely is someone who has completed that goal to become a customer? How much does your company stand to make if that person becomes a customer? If you feel that 1% of all people who perform a goal will become a customer and if you make $100 in profit off each sale of your service, than an ACPCon would be $1.
Use this figure to calculate what your bids should be for an ad that drives them to the goal.
Coming up with an ACPCon and using this number to come up with appropriate bid amounts will help you determine which of your ads are the most successful and the most profitable. It will also help you to keep a positive ROI and even increase that figure.