One of the advantages of online marketing is the ability to track visits and conversions on your web site and to connect them to your campaigns and your sales results. Avinash Kaushik has written on making it easier for business people to connect to the analysis of online marketing programs and has some great ideas on turbocharging your search marketing PPC campaigns.
What if we extended this idea of connecting campaign and financial outcomes by tracking results from the beginning of the funnel to the end, starting with advertising impressions on the search engine response page, continuing through visits to your site, and eventual purchase of your product?
I’m going to describe here a simple model that will track the flow of visitor activity through your website funnel and translate it into a financial result. The narrative for the this model starts with a question:
How much would you have to spend on advertising to obtain another dollar in gross margin?
We’ll use as an example a small company with one product. Imagine a company that has $1M in sales, that sells a technology product to business customers which has an average sale price of $10,000, and that makes 20% gross margins on its product for annual gross margin of $200,000. Current marketing campaigns will enable it to continue this level of business. This company wants to grow and so it is planning to invest in a marketing campaign that would enable it to complete an additional 20 sales annually. These 20 sales would produce $200,000 in revenue and $40,000 in gross margin. To keep things as simple as possible, we’ll assume that the entire marketing investment will be spent on paid search (PPC) advertisements.
Here is the simplified income statement for the new product sales:
Now that we know the goal, to generate 20 new sales and $40,000 in gross margin, we need to look at the other end of the funnel to see how much advertising it would take to generate this many product sales. If the company ran an Adwords campaign with enough keywords that its paid search ads were displayed 3,000 times per day, this company would display 1.1M ads per year.
If the click through rate was 2% (typical for paid search ads for B2B buyers) then 22,000 people would visit the site.
If 3% of those visitors registered for an article, then 660 people would get the article.
If 10% of those who registered became a sales lead, that would be 66 people.
If 30% of those sales leads made a purchase, that would be 20 new product sales.
Here is the funnel through the site:
Now let’s look at the advertising costs to generate these 20 new sales.
The cost of the 22,000 ads at an average of $.50 per click would be $11,000.
Cost of advertising:
So, the cost to purchase $40,000 in incremental annual gross margin was $11,000 for a return-on-investment of 260%.
ROI of search marketing campaign:
The answer to our original question, how much does it cost to buy an additional dollar of gross margin? In this model, about twenty-eight cents. Twenty-eight cents on the dollar, or 260% ROI , is a reasonable return for this type of investment.
Caveats and assumptions
Ok, let’s pick some holes in the model and then we’ll look at some ways this model could be used to make decisions about marketing investments and campaign management.
As I said, the model is simple. It’s purpose is to give you an overview of your investment and campaign. It doesn’t include the other costs to modify the site, it assumes all new traffic is a result of the PPC campaign, it assumes that conditions are static for a year, and it assumes a short sales cycle.
But when a client says to me, “If I make this marketing investment, what kind of a return can I expect?”, this is a way for the two of us to look at the campaign and the results and build a straightforward model to answer the client’s question at the beginning of the campaign and then to use it to track our progress once the campaign is underway. The metaphor of the funnel enables us to track the flow of investment and results from ad impression to gross margin.
Using this model for decision-making and what-if analysis
This model could be used to see where you should put energy into improving conversion rates. For example, if this company could improve the conversion rate for visitors who register for the article from 3% to 5%, it would only have to display 1800 ad impressions per day instead of 3000, it would spend $6,600 on ads instead of $11,000, and its ROI on the campaign would be 500% instead of 260%. The company could experiment with different articles and changes to the landing pages to improve this conversion rate.
The model also shows the value of nursing visitors, 90% of whom register on the company’s site but do not show enough interest to be considered a sales lead. Many of these visitors could become more interested in becoming a customer in the future if the company continues to nurture the relationship.
What about you? Is this useful? Are there changes or improvements that you could suggest that would improve the model? Would you be interested in having an Excel spreadsheet version posted to this site?
I’d like to improve this model and expand it, so if you have suggestions, please put them in the comments and I’ll respond.
Thanks!
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