Measuring PPC ROI: Ur Doin It Wrong
December 10th, 2008 by Doug Bright
We all agreed long ago that the advantage of pay per click ads over more traditional advertising was that we could use conversion rates to measure ROI accurately. As a result, we amped up spending on ads that were paying off and ruthlessly eliminated those that failed to reach breakeven.
What we didn’t consider, however, is that many of us have been calculating breakeven wrong.
Traditional PPC conversion rate calculations artificially depress ROI because they ignore the future behavior of new customers. Consider an example where we are testing two ads:
| Ad 1 | Ad 2 |
 |
|
| Cost Per Click: $0.50 Conversion Rate: 3% |
Cost Per Click: $0.50 Conversion Rate: 5% |
For the sake of simplicity, let’s assume that every shoe we sell makes us the same profit. According to traditional analysis, ad 2 is the clear winner in this case. We would turn off ad 1.
But what if customers who buy through ad 1 are much more likely to return for 2nd and 3rd purchases? If ad 1 clicks produce loyal repeat customers while ad 2 clicks produce bottom feeders, we’d be attracting exactly the wrong type of customers. Yet that’s exactly what we do when we don’t consider customer lifetime value in our PPC ROI calculations.
So next time you evaluate ad performance, consider the likely future behavior of each new customer. Otherwise you might be compromising the quality of your customer base.
Tags: AdWords, PPC, ROI measurment
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