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THE FINCH BLOG

Google AdWords often represents the single largest marketing expense for eCommerce companies, yet the knowledge of how it works and how to measure and influence success is shockingly low. This quick guide shows three types of Return on Ad Spend (RoAS) measurements. Read on to see which is the most applicable for your business.

 

The examples use Broad, Phrase and Exact match types to illustrate the compound impact.

Cost Per Acquisition (CPA)

You have one product or your have many products with the same price, so each conversion is worth the same. Here is an example for calculating the max cost per click for each match type using this methodology with a $25 CPA target:

Keyword Conversion Rate Max CPC
Earn more 0.25% $0.063
“Earn more” 1% $0.25
[Earn more] 5% $1.25

Cost Per Value (CPV):

You have many products with different prices, so each conversion is worth a different amount, but each dollar of revenue is still worth a dollar. Here is an example for calculating the max cost per click with the cost of revenues (Value) target of 10% (AKA 10% CPV target, or $.10 per $1 of revenue you earn):

Keyword Conversion Rate Revenue (Value) Max CPC
Earn more 0.25% $500 $0.13
“Earn more” 1% $2,500 $2.50
[Earn more] 5% $10,000 $50.00

Cost per Profit (CPP)

You have many products with different profit margins, so each conversion is worth a different amount of profit. The example below illustrates the maximum you should be willing to pay per click if you have a 50% cost of profit target (i.e. spend half of your profit from the last transaction to get the next one). This example assumes that you have you have a 30% margin on the products you sell.

Keyword Conversion Rate Revenue (Value) Profit Margin Max CPC
Earn more 0.25% $500 30% $0.19
“Earn more” 1% $2,500 30% $3.75
[Earn more] 5% $10,000 30% $75.00

As you can see from the numbers above, there is a dramatic difference in how much you are willing to bid when you have defined a measurement of success. The biggest difference is gained by moving away from CPA (which is based on averages that are usually identical for all advertisers inside an industry) and by moving towards using your own revenue and profit data. The closer you can measure your financial success, the more success you can have with the Finch system.

The above examples just show the bidding. Wait until you see the results from it! You will OWN position #1 with all of your best performing keywords for exact match, triggering a full ecosystem of exponential AdWords benefits that self-propel each other. You’ll also be priced profitably for your other keywords.

Once you know where you fit, the next step is knowing how to influence the metric and make it grow. Surprisingly, over 95% of the companies we speak with are using CPA as the measurement of success even if CPV or CPP describes their companies accurately. If you want to learn more about how to influence and optimize for CPV and CPP, visit our website at finch.com. We will give you a free analysis on how a different measurement will positively impact how you compete for the best and most valuable clicks.