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Re: Overture effectiveness -- not

From: Steve Harrison <merlin_at_paypermaster.com>
Date: Thu 07 Mar 2002 20:19:53 -0600

I'm surprised to still see figures such as "$1 spent for
every $25 earned" being bandied as representing a
meaningful measure of an advertising campaign's value.
While a 1:25 spend-to-earn ratio may be meaningful for
one company, or one product or product line, it's
curious that such math would be suggested as any sort of
universal yardstick to gauge the profitability, and
especially the productivity, of advertising in Overture
or any other PPC.

The first thing to be known for that measuring stick to
hold any meaning must surely be: "What is the profit
margin in play for that example?" Are you selling solid
gold widgets with a $5,000 profit margin, or little pink
widgets that make you $25 per sale? There isn't enough
information in the 1:25 scenario to work for everybody --
there are other variables involved.

In the little pink widget example, it would take a
whopping 10% site Conversion Rate (CR) at a max bid of
$0.10 to realize a 1:25 spend-to-earn ratio ($0.10 bid
x 10 clickthrus = $1.00 spent, times 10% CR for 10
clickthrus = 1 sale = $25 profit = 1:25 ratio). Talk
about Great Expectations!

For the gold widget example, $5,000 profit divided by
25 = $200 spent for every $5,000 earned (1:25 ratio).
$200 @ $0.10 per clickthru = 2,000 clickthrus for every
1 sale = a pretty unremarkable 0.05% CR. If this web
site was turning a more average 2% CR, they could afford
a $4.00 bid cap to realize a 1:25 spend-to-earn ratio
($5,000 @ 1:25 ratio @ 2% CR) = $200 * 2% = $4.00 bid
cap. Hardly the same realities the little pink widget
site must live with.

Any calculations or proofs that don't take into
consideration: 1) the profit margin of what's being sold;
2) the site's historical (expected) conversion rate; and,
3) the top amount that site can afford to bid per
clickthru (bid cap) to remain profitable is pure folly
as far as determining whether any given advertising model
is good business.

At a 2% CR the gold widget vendor is happy so long as the
$4 bid cap is not exceeded -- but at a 2% CR the little
pink widget vendor can't even consider Overture due to
the nickel minimum bid policy (bid cap would be $0.02 to
do a 1:25 ratio). Even at the nickel minimum bid, the
little pink widget site would need to be turning a rather
handsome 5% CR to realize a 1:25 ratio. Pretty lofty
expectations for most e-commerce web sites. [Granted, if
those widgets are adorned with a pic of some teen idol in
a wet t-shirt, all CR averages are off].

Of course, those two examples are extremes. Where does
your (or your client's) site fit in that spread? Does
reality even permit a 1:25 ratio?

Perhaps a more universal yardstick would be to calculate
a Cost Per Sale for Overture-delivered traffic, isolated
from all other site traffic, and bias that against the
profit margin for what is being sold. Still, that's
working backwards -- after the fact -- isn't it?

Better yet, and to know going in, why not calculate what
your actual bid cap must be, based on known or determined
factors. That would be working a bidding strategy toward
a targeted ROI rather than calculating the ROI after the
fact. Stay within that bid cap and you'll meet or exceed
that target ROI.

Actual example: a client's weighted average net profit
(after all other expenses) for his product line is $215.
He wants a minimum 500% ROI from his site's historical
CR of 1.85% and he's willing to (determines to) sacrifice
20% of that net profit ($43) to PPC clickthru expenses.
By working with those known and subjectively determined
figures, he knows his bid cap to be $0.80. He stays
within that bid cap and never realizes less than a 500%
ROI. To realize a 2,500% ROI (1:25 ratio) his bid cap
would have to be $0.16.

At that low of a bid cap -- sacrificing 4% (for a
2,500% ROI) instead of 20% (for a 500% ROI) of net to
clickthru expenses -- it would be doubtful that the
traffic volume at the positioning $0.16 would buy him
for his primary keywords in Overture would be enough
to keep him smiling. It would certainly take some
volume of traffic from other sources to keep him in
business. Sure, a 2,500% ROI is profitable, but is it
livable? He needs to sell more than one or two a
month to Overture traffic.

So, is Overture a profitable advertising exercise for
that client? Yes, because we make it that way without
guesswork. Is Overture as PRODUCTIVE as FindWhat? Nope.

Remember, that $0.80 bid cap applies to all PPCs. An
80-cent bid cap will typically allow better positioning
in FindWhat and other "junior" PPCs than it will in
Overture.

Consider that the bid for "casino gambling" (hypothetical
-- NOT my client's gig) for #1 positioning in FindWhat is
currently $0.70, but will allow at best position #31 in
Overture. Will position #31 in Overture deliver more
visitors than position #1 in FindWhat for the same search
term? Not lately.

Too much math... head spinning... Mayday-Mayday-Mayday... :o]

Steve Harrison ~ Pay-Per Master
Free Bid Cap Calculator at
http://www.paypermaster.com/bidcalc.html
merlin_at_paypermaster.com





Received on Thu Mar 07 2002 - 20:19:53 CST


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