There are many sources of traffic for an ecommerce website. Some of them are:
- Search engines
- Social media
- Word of mouth
- Conventional media
- Pay per click (PPC).
Each traffic source has its pros and cons. I find it fascinating that many ecommerce businesses are maintaining healthy profits, and growth, solely with PPC ads.
The PPC Math
The clicks that you are paying for can quickly add up to a large number. Hence it is important to get a grasp on the Math involved in PPC campaigns for ecommerce businesses. Here are some important terms that you will have to keep in mind before understanding the Math.
- Cost Per Click (CPC)
The CPC is the cost that you pay the PPC ad network, such as Google AdWords, to get one click on your ad. That translates to one visitor to your ecommerce website. Often the CPC is not a number that is determined before hand. Ad networks such as Google AdWords use an auction mechanism. As a result your actual CPC is usually lower than the maximum CPC setting.If you want your calculations to be conservative, you can consider your CPC to be the maximum CPC that you have permitted. A more accurate calculation could be obtained by considering the actual CPC that you end up paying. The problem with using the actual CPC is that it changes from time to time. A sudden spike in CPC could derail your pay per click strategy.
- Conversion Rate (CR)
Based on your track record, you should know the proportion of visitors who end up making a purchase on your ecommerce website. For instance, if you find that, on an average, 3 visitors out of every hundred make a purchase, then your conversion rate is;(3 ÷ 100) = 0.03
- Yield per Conversion (YPC)
Divide the total profit made, by the number of visitors who made those purchases. This gives you your yield per conversion. In calculating profit, make sure to deduct your cost of procuring the goods sold. Also deduct costs such as payment gateway charges and shipping. Do not deduct fixed overheads, which are not directly related to the cost of goods sold, such as your establishment costs. Also, do not deduct the expenditure on PPC advertising.
- Yield per Visitor (YPV)
Yield per visitor is the product of CR and YPC, i.e.,YPV = CR × YPC
The yield per visitor gives you the average amount of money you expect to make per visitor to your website.
The PPC Profitability Formula for Ecommerce Businesses
You are making money if:
For those who hate Algebra, let me elucidate. As long as the cost per click you bear is lower than your yield per visitor, you are making money.
To put it another way, the CPC is what you spend to get one visitor, and the YPV is what you earn per visitor. As long as the YPV is greater, you are making money.
Suppose you set up a PPC campaign on Google AdWords, and your CPC is $0.25. Based on your experience, you know that 2% of the visitors to your site make a purchase. So your CR is 0.02. Now assume that the average profit you make per sale is $12.5, i.e., your yield per conversion is $12.5. We can see that:
CPC = $0.25
CR = 0.02
YPC = $12.5
YPV = CR × YPC = 0.02 × 12.5 = $0.25
Hence CPC = $0.25 = YPV
This situation where CPC equals YPV is called breakeven. At the breakeven point you are neither making nor losing money.
Notes on Computing PPC Profits
- Though the calculations indicate that you will make money above breakeven, you should try and ensure that you are far above breakeven, so that you make a healthy profit.
- All variables in the computation are within your control; at least to some extent. Try to increase your CR and YPC, while lowering your CPC.
- Because fixed business overheads are not factored into this computation, most small ecommerce businesses need the YPV to be much higher than the CPC, often by a multiple of 5 or more.