The 3 Most Important PPC Metrics
If we had to pick the most important metric for paid search, that’d be easy. ROAS, or Return On Ad Spend (this of course is excluding those really advanced folks that are pulling in margin to bidding). And the goal isn’t to necessarily maximize ROAS (though bigger is better), but to target the right ROAS and maximize traffic volume (and by definition, revenue) at that ROAS.
So, what is the right ROAS? You guessed it – it depends and this isn’t that post. Let’s get back to the most important metrics.
First, let’s do some algebra…
But why in the world are we doing algebra in service of PPC? Because we believe the key to unlocking the economic power of PPC advertising with any degree of scale is in the math. The right keyword targets, great ad copy, effective landing pages – these are all critical for effective PPC advertising. But we believe they are just the foundation. It’s the application of strong quantitative analysis and the powerful bidding strategies that are a byproduct of that work that enables us to drive exponential gains for our clients.
Now, back to the math! We know the basic formula for ecommerce:
We also know that:
Making some simple substitutions for Revenue and Traffic recalling our first formula:
Our formula becomes:
Which we can simplify to:
And finally reach this formula…
That’s great Paul, but why did we do all that 8th grade math?
The ability of PPC to generate revenue depends on its ability first to drive traffic.
One of the key factors to driving paid search traffic is quantitatively understanding how much you can bid on a given keyword. In theory, the more you can afford to bid, the more traffic you will be able to drive. You’ll appear higher in the results, you’ll get a greater impression share, will be more competitive for your keywords and therefore get more traffic.
The key word in the previous paragraph is afford. How much you can afford to bid is directly related to our three most important metrics: Conversion Rate, AOV and ROAS. Let’s look at each.
1. Conversion Rate
The percentage of traffic that converts to a purchase (or a lead). If a site has a lower conversion rate than its competitors, and assuming a similar AOV, managers will have to choose: lower our ROAS so that we can continue to bid our CPC’s competitively OR be less competitive with our CPC’s and get less traffic. It’s a choice between less revenue or lower margins. Neither is good.
Same math applies here as for Conversion Rate. If our competitor does a better job of upselling, and therefor has a higher average order value, they will be able to bid more on keywords, driving more traffic at the same ROAS as us. Again, we’re at a competitive disadvantage. Think about those times you have a sale. Your AOV generally goes down, however your conversion rate increases at a much faster rate than you see you AOV drop. This is why you can afford to increase your bids and pay more per click during sale periods.
This is where some strategy comes into play, as this metric is a Target metric, something we can set based on business objectives and strategy. If our goal is to build traffic, but profitability isn’t a primary driver, we can lower our ROAS target to allow for more aggressive CPC bids, which would drive more traffic. Now, this isn’t a sustainable strategy and should only be used to drive traffic needed to support optimization efforts that improve Conversion Rates and AOV. As these metrics improve, the ROAS target should increase to more profitable levels (depending on product margins).
So what do I do now?
We’ve created a simple calculator that you can use to plug in your site’s Conversion Rate and AOV. Then, you can choose an ROAS target which will show you how much you can bid to hit your target ROAS.
And please make sure you have a different strategy and ROAS goal for the paid traffic you are driving through search on your brand keywords vs your non-brand keywords.
As you might expect, this is an oversimplification of how to determine the right CPC for a given keyword. Our team uses a combination of enterprise bid management software, combined with a detailed understanding of bid strategies like these to manage our paid search campaigns to extraordinary results.