PPC Advertising – CPC vs. CPA

Paul Weinstein / 22nd October 2012 / Comment

Nielsen Global AdView Pulse media Q2 2012

It is no secret that PPC Advertising is becoming a more and more important means of targeting and reaching consumers today. In the first half of 2012, Internet Advertising spending increased by over 7.2%, outpacing growth in all other verticals according to Nielsen Global AdView Pulse Q2 2012 report released last week.

The real secret is how to leverage this powerful media vertical and to get more results from those increasing dollar spends. Clearly, brands and advertising companies alike see the value of Internet Advertising versus other media types, but is there more value to be found?

It turns out there is, and it is not that difficult (or expensive!) to do.

The answer lies in re-framing how you think about, and plan, campaigns. Most companies start with a PPC budget and then work to allocate those dollars across Campaigns, Ad Groups and Keywords. From there, they manage and optimize campaigns against cost/click or even cost/conversion, but they miss a critical piece of the equation.

The alternative is to begin with the end in mind and work back to where most start.

Step 1 – Decide on the desired outcome. The real secret is in determining the value of the desired outcome of the campaign. Said differently, what is the key objective of the campaign? Is it to generate sales? Drive lead volume? Increase white paper downloads? And (here’s the most important point) what are each of those outcomes worth?

Step 2 – Place a value on each outcome. In answering these questions, the most critical step is that we calculate the value of each desired outcome. What is a lead actually worth? Are different types of leads more valuable than others? If you have an eCommerce site, what is the value of an average sale? For lead generation campaigns this can be difficult to determine at first, but once you start to look at the sales pipeline and how leads convert to sales, it starts to be come clear.

Step 3 – Determine your target ROI. Next we need to consider the desired return that is needed from the campaign. This will be determined by considering several factors including margin, customer LTV (life-time value) and other budgetary considerations. The bottom line is that we need to decide at the outset what kind of return we need from the campaign, normally expressed as a % ROI and then as $/conversion.

Step 4 – Optimize based on ROI. Once we know the value of the outcome and the return that we need to achieve, we can then turn our attention to optimizing our campaigns based on CPA, or Cost per Acquisition. This strategy places our optimization focus squarely on the value being created from each element of our campaign, instead of the cost.

As we monitor a Campaign, and its Ad Groups and Keywords, we are now looking for those elements of a campaign which are delivering value and we eliminate any element that is not.  This process allocates our budgets toward those campaign elements that are most efficient at maximizing the return of each dollar spent.

Here is a chart comparing the two strategies to managing and optimizing PPC Advertising campaigns.

CPC (Cost per Click) Model

CPA (Cost per Acquisition) Model

Decision driver: Cost per conversion

Decision driver: Return on Investment

Focuses on how much is spent

Focuses on the value generated

Campaigns, ads & keywords are managed based on cost

Campaigns, ads & keywords are managed based on value

Treats each conversion equally, without regard to varying degrees of value

Focuses attention on amount of value each campaign element drives, forces removal of inefficient campaign elements

Campaign refinement based on cost, not return

Campaign refinement continuous & based solely on ROI

Funds allocated across campaigns in somewhat arbitrary fashion

Funds allocated to most efficient campaigns that drive return

With this approach to PPC Advertising, a renewed focus on the value generated by your campaigns will be achieved and it will become clear where to spend advertising dollars… and it won’t be a surprise when Internet Advertising leads the way again next year.

Tell us how you’ve optimized your campaigns, and what model you use to get the most of your PPC Advertising dollars.

By Paul Weinstein