Understanding Conversion Ratio, Click Value, and ROI

There’s one huge disadvantage to PPC ads, though . . . they cost money. Sometimes a lot of
money. Often, in fact, so much money that you will lose money if you buy PPC ads! In order to
use PPC, you really must understand Conversion Ratio, Breakeven Click Value, and Return on
Investment (ROI):

■ Conversion Ratio The proportion of visitors to your site who buy from you. This is the
foundation of any click-value or ROI calculation.

■ Breakeven Click Value The “breakeven” value of a click is the maximum sum you
can pay for a click and not lose money. Of course, you want to pay as little as possible,
but there’s a point at which a click doesn’t make you money and doesn’t lose you money.
If you go over the price, however, you start losing.

■ Return on Investment The amount of money you make after investing in advertising,
typically expressed in terms of the sum returned for every dollar invested. If you pay
$1,000 for ads, and make a profit of $10,000, your ROI is $10 per $1 invested.
You need to consider these things three times:

■ When you have no background information When you first begin considering PPC
ads, you may not know what your conversion ratio is. That is, you don’t know how
many people coming to your site will buy from you. You can, however, do a simple
“guesstimate” to figure out whether PPC will work for you. At this point, you can decide
if PPC is worth doing.

■ When you know your conversion ratio Once you understand what your conversion
ratio really is, you can calculate more accurately whether PPC will work for you. At this
point, you’ll have a much better idea of the likelihood of success.

■ When you’re running a PPC campaign Once you’re buying PPC ads, and people
are coming to your site, you can calculate ROI exactly. It’s then that you’ll know exactly
whether (under current conditions) PPC works for you.
In order to calculate click value and ROI, you must first know—or estimate—your conversion
ratio. The conversion ratio is the relationship between the number of people carrying out some
process and the number of those people who move on to the “next step.” For instance:

■ If 100 people see an ad, and three click the ad, the “conversion” is 3:100, or three percent.

■ If 100 people come to your web site, and ten sign up for a newsletter, the “conversion” is
10:100, or 10 percent.

■ If 100 people come to your web site, and one buys a product, the “conversion” is 1:100,
or 1 percent.

Of course, it’s the last of these that we’re most interested in. Of all the people who come to
your site, how many will buy? This conversion ratio is the core of any ROI calculation.