SEO

Forget About Cost-Per-Conversion: It’s Time for AdWords Metrics 2.0

It becomes less and less frequent to have to brush up on which metrics to look at when I perform my seminars for intermediate AdWords advertisers.

They usually know that the best approach is to review a mix of metrics such as:

  1. CTR
  2. Conversions
  3. Cost per conversion
  4. Value per conversion

By using these four metrics you’re sure to find the ad that will bring you:

  1. The most traffic
  2. with the most conversions
  3. at the lowest price
  4. while bringing the highest overall revenue

But lately I’ve found that what used to be best practice in AdWords no longer really applies. Google has made so many changes and added so many new features to AdWords that some things must have inevitably changed.

And metrics is definitely one of the areas. Not too long ago Google introduced Value Tracking and for some time we’ve been able to import revenue from Google Analytics. It was however not until earlier this year that I started paying more attention to the Conversion Value / Cost metric when managing AdWords campaigns for Ecommerce companies.

Why You Should Forget About Cost Per Conversion

Cost per conversion becomes less important when you start comparing it to Conversion Value / Cost. You essentially don’t care about having a set goal for your cost per conversion. Instead you should aim to have a certain amount of margin with each sale. If the Conversion Value is high enough for a certain keyword then you will be able to afford a higher cost per conversion in comparison to other keywords with lower Conversion Value.

Ecommerce companies who sell backpacks, luggage, wallets etc. can be a great example. A wallet will frequently sell for as low as $10-$20. If you want to maintain a 5-1 ratio in revenue-to-cost in order to ensure profitability you will need to have a cost per conversion at around $2-$4.

However, when selling suitcases the price range increases a lot. Your average sale is all of a sudden in the $100-$200 range for the cheapest suitcases. You still want to maintain a 5-1 ratio, so instead of $2-$4 in cost per conversion you can afford $20-$40, 10 times higher.

Some luggage sales are likely to be much higher because families tend to buy suitcases for every family member at once causing an order to easily reach $500. All of a sudden you can afford to pay a lot more per conversion than if you had just put in a flat cost as conversion goal for your account.

By using Conversion Value / Cost you will be able to set precise bidding on the spot without further calculations, integrations or spreadsheets. The metric is also amazing when you are using AdWords Scripts to manage your bids.

Conversion Value / Cost Automatically Calculates Your Revenue Ratio

Some might argue that it’s hardly a big deal to find out what the ratio is between revenue and cost, but I’ve found it extremely helpful to use this metric in my AdWords work. It’s increased my productivity and saved me time when getting a feel for the profit-levels in a new AdWords account.

Especially when I’m doing account audits internally in White Shark Media or for Clients in PPC Profit. The campaigns, ad groups or keywords with a too low Conversion Value / Cost number can be one of the best places where to start optimizing your AdWords campaign.

Here we see a real life example:

For this account we’re aiming the ratio between revenue and cost to be around 8 or higher. If I had only looked at the cost per conversion, then I’d find out for instance that Campaign A and Campaign B were doing around the same. They’re very close in both conversion rate and cost per conversion.

However, the Conversion Value / Cost is pretty different. The Conversion Value / Cost for the Campaign B campaign is a whopping 24.2 while Campaign A is just above our lower limit with 8.1.

As you can see, the bidding (avg. ad position) also mirrors the fact that we’re earning much more per dollar spent in Campaign B as opposed to Campaign A. Campaign B has been pushed towards the top 3 spots for all keywords and I predict it could even be pushed further.

Based on this initial assessment, Campaign A should on the other hand not receive any increases in bidding. I could name numerous other examples in this account and others where I’ve been able to dissect the true campaign performance more precisely by using the Conversion Value / Cost metric rather than relying on Cost per Conversion.

Takeaways For Your Own AdWords Management Tasks

I want you to go away from this blog post and try to enable the Conversion Value / Cost metric in your AdWords campaign. By starting to enable this in your account you’ll be a lot more knowledgeable about how you should set your bidding.

Bid management is one of the aspects of AdWords management that in my experience scares new advertisers the most. By implementing this metric the bid management aspect should become easier even if it’s just a little bit.

If you have found any new useful metrics in AdWords that you didn’t use previously, then I would be happy to hear from you in the comments below.

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 Forget About Cost Per Conversion: It’s Time for AdWords Metrics 2.0

Andrew Lolk

Co-Founder at White Shark Media at White Shark Media
Andrew Lolk is the author of the 189-page free AdWords ebook The Proven AdWords Strategy. He's worked in AdWords since 2009 and have co-founded White Shark Media; A leading Search Marketing agency and Google AdWords Premier SMB Partner.
 Forget About Cost Per Conversion: It’s Time for AdWords Metrics 2.0

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5 thoughts on “Forget About Cost-Per-Conversion: It’s Time for AdWords Metrics 2.0

  1. So, aren’t you already running wallet campaigns at CPA target average $2-4 , and suitcase campaigns at CPA target average $100-200? And bidding accordingly? (notwithstanding seasonal buying patterns)

    And what happens if some wallet buyers cross-sell to higher value suitcase many-per-click purchases, even some of the time? Would you stop buying the wallet purchases? Even though sometimes they create much higher value?

    How can profitability of your campaigns and product lines for your business as a best practice “no longer really apply” – no matter what new bells and whistles Google introduces?

    Every campaign should be running as it’s own profit center.

    1. I can see what you’re saying, David, but instead of taking a manual approach with it by saying that you simply optimize for CPA-levels, then you can use the dynamic number Conversion Value / Cost and know exactly what each keyword brings of value to the table.

      Some wallets sell for substantially more than $10 and the different brand keywords bring in different conversion values.

      Taking an old-school approach to this calculation is unnecessary in my book, which prompted this blog post.

      “And what happens if some wallet buyers cross-sell to higher value suitcase many-per-click purchases, even some of the time? Would you stop buying the wallet purchases? Even though sometimes they create much higher value?”

      How many of your ecommerce Clients has a system implemented that can tell you this information? Value within the Cookie-time is easy to track, but what happens when the user changes device?

      All data available should of course be used, but you would be in the same predicament bidding for CPA levels as you suggest. Is it perfect to bid for the sales value within the cookie ? Hardly, but it’s miles better than a static CPA goal based on product categories.

      1. Hi Andrew, I agree that tracking the full, true value of all clicks and all conversions is tricky.

        My method just means that I’m keeping as focused as possible on conversion costs based on what I know of my clients stated average order values and margins – ultimately he has to do the whole math of the profitability as I can’t know his other costs, like staffing, premises, and so on.

        After all, I’m not running his business – he is. I’m just trying to run his campaigns as accountably as possible for profitability.

  2. Well written post. You’ve laid out some good “rule of thumb” methods to benchmark performance. Adwords certainly is going through a lot of changes these days. Everyone is afraid of the higher CPCs from enhanced campaigns. This information helps focus on a new set of metrics.

    1. CPC doesn’t matter, neither do budgets, as long as we “follow the money” and earn more than we spend.

      Then, amongst your product/service portfolio, you’ve got to work out which ones PPC is profitable for, and which ones it’s not.