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Are My Roi Calculations Off?
Posted 18 February 2004 - 01:25 PM
Here's what I know:
keyword: $5.01 Cost-per-click
last Month's searches at Overture: 7679 searches
my conservative estimate of how much traffic to expect (market share of those searches): 0.50%
what the law firm usually accepts as a case (conversion percentage): 5%
so ('searches' * 'traffic share' * 'cost-per-click') / 'case conversion percentage'
( 7679 * 0.50% * $5.01 ) / 5% = $2,249.95 cost-per-case
The main function of this exercise is to determine the advertising efficiency of many keywords at once. With this result I'll be able to compare cost-per-case figures, selecting the best combination of price and traffic - traffic could be low enough that the keyword converts several months, even years later, making the term insignificant.
Any suggestions on what I'm doing wrong / right?
Posted 18 February 2004 - 04:08 PM
I think some of your assumptions might be off slightly, but lets see what I get (I am figuring this out as I write):
7679 Searchs X .005 (0.5% CTR) = 39 Clicks
39 Clicks X $5.01 CPC = $195.39 Total Spend
39 Clicks X .05 (5% Conversion Rate) = 2 Conversions
$195.39 Total Spend / 2 Conversions = $97.70 Cost per Conversion
Yeah your calculation was off a little
Posted 18 February 2004 - 04:27 PM
First the CTR of .5% is low... obviously you are not near the top spots with a CTR of that small size... if you are in the top 2-3 you should be getting a 2-8% CTR.... now conversion rate is another story.... and the numbers can be impacted by the creative used...
Vester your equation is right just the numbers are off...
Posted 18 February 2004 - 06:30 PM
39 Clicks X $5.01 CPC = $195.39 Total Spend (PER MONTH)
They will spend about $1,000 a year. Not a lot of money, really. When talking about ROI, the conversion rate doesn't really apply, in terms of "looking ahead". What it applies to is simply how much XYZ someone needs to sell to break even, e.g.
Total monthly spend = $5,000,
Average margin == 25%.
Total sales needed to break even == 100 / Margin * Total Monthly spend == 100 / 25 * 5000 == $20,000.
The CPA (Cost Per Acquisition) may be important, especially for a law firm, but that is very different to ROI.
<added> OK, forget all that. ROI can not be measured in advance (I knew something was up with that. Bit of a hangover unfortunately). ROI is impossible to work out, as no two law suits ever get the same payout. So without knowing the R, the o and the I are pretty meaningless.
What you really wanna calculate is: CPA (Cost per Acquisition).
Which is: Total output / total sales. Simple!!!!
Now back to my hangover...GROAN</added>
Edited by projectphp, 18 February 2004 - 10:13 PM.
Posted 19 February 2004 - 09:23 AM
Aussie - You're absolutely right with 2-8% - I was just being conservative, as in the absolute worst case scenario without being disabled by Google.
Vertster - Good looks on the correction. I knew it was skewed upwards, I just couldn't put my finger on it.
Projectphp - I thought I'd escaped that breakeven calculation. ha
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