If you can’t answer 3 essential questions about paid search, stop right now! Do not pass go. Do not collect $200. I wish it were as easy as playing with monopoly money, but the truth is many companies allocate millions for paid search or paid marketing in general but don’t see earnings that meet their expected return on investment (ROI). A lot of money is left on the table. Without knowing the right metrics to track, it’s a roll of the dice.
Time and again, companies ask me to help with their paid marketing campaigns. Over the years, I’ve seen paid search performance reports like the one below where the marketing department launches paid search (PPC) right off the bat to scale revenues. However, what so many companies fail to do is forecast their objectives for outcomes or know how to measure results.
What jumps out on this table are three key variables:
- Conversion rate
- Cost per Conversion (CPC)
- Customer Acquisition Cost (CAC)
Let’s investigate the ramifications. The first time this marketing department tried a paid search campaign, they invested in excess of $100k for paid ads over a 12-month period. But look at their conversion rates in the first highlighted column. Very low.
The other data that jumps out is their Cost-per-Conversion or Customer Acquisition Cost (CAC) is through the roof.
You’d be surprised at how many companies don’t know how to calculate costs and end up paying too much marketing spend for their paid search campaigns. But that is still the tip of the iceberg as those metrics can always be optimized. The bigger issue that jumps out is this client is missing the 3 key metrics without which they should never have launched this campaign!
Those 3 critical metrics are:
- How much revenue per customer you are making?
- What is the break-even cost?
- What is the Lifetime Value of the Customer (LTV)?
Without knowing the answers to these questions, you’ll never know if paid search pays off.
Keyword Volatility in PPC
Just like the stock market that has volatility, paid search is something you have to monitor day in and day out because it’s an open bidding platform that is very dynamic. Like stock prices that go up and down, in the paid search world, keyword prices can go up and down every day. This is the reason why marketers must manage paid search campaigns proactively.
Keywords are built on an open bidding platform. This means for a certain keyword, any number of competitors can actually bid on the keyword and start a campaign against that keyword. Therefore, you must stay on top of your paid search because of keyword volatility. Unless you know your Customer Acquisition Cost (CAC) you are in danger of losing too much of your marketing spend.
Marketers need to answer these 3 questions before doubling down on paid search:
1. How much revenue are you making per customer?
To learn how much net you are earning per customer, you must find out the marketing Customer Acquisition Cost (CAC) and the total revenue per customer.
Let’s say, you spend $5,000 to acquire a customer but are breaking even at only $3,000. This means you are running in the red by $2,000 and your paid search campaigns are not profitable. You should also take into account the time spent on campaigns by either your internal team or outside agency and bake the manpower cost into your CAC.
The first thing to ask when doing a paid search campaign is to make sure you know how much revenue you are earning per customer or your CAC.
2. What is the break-even point?
Your break-even point is the point where total costs (COGS) and total sales (revenue) are equal. It is a point where there is no net profit or loss.
Let’s continue with the same example and say you are spending $3,000 to acquire each new customer and you make an average of $5,000 on each new customer. If you break even at only $3,000, anything after that is net profit–its like gravy. You know you can afford to spend that much on marketing to get that customer or also known as allowable CAC. Again, it is critical to figure this out as this way you are in control of what you would like to spend as your customer acquisition cost.
3. What is the lifetime value of the customer?
Calculating Lifetime Value of your customer can be tricky. I have met with many leaders who have been spending millions of dollars on marketing and still not know the lifetime value (LTV) of their customers. But this is a super critical piece of metric that every organization should know.
For example, if you spend $5,000 on customer acquisition cost (CAC) and the LTV per customer is $15,000, then you’re okay to spend $5,000 to acquire a new customer. Why? Because over the lifetime of that customer you stand to make $15,000. Unless you don’t have LTV in place you won’t know what is your allowable CAC.
Even though in the short term you spend $5,000 to acquire a customer, over the lifetime of their business, you may possibly earn $10,000. That’s how to determine your net profit.
Now LTV is usually not a marketing metric you can calculate in the first year. Just as the name implies, LTV is something you earn over a lifetime. And typically that could be 2, 3 or even 5 years after you acquire the customer for the first time.
Knowing the answers to these questions is an essential part of paid marketing. Unless you know how much revenue you make per customer, the break-even point and the LTV of a customer, you’re driving blind. And that’s not how you win the game!
Do you have similar challenges with paid marketing? Are you leaving money on the table? Let’s connect and we’ll figure that out!