How much revenue a conversion generates is important when determining a budget for a campaign. In the simple case of a sale on an ecommerce website, that number usually is the average order value (aka AOV) you receive from a conversion:
| Average order value = Total revenue from orders / Total number of orders |
If a website generates $10,000 of revenue from 25 orders, the average order value is $400:
| Average order value = $10,000 / 25 = $400 |
That revenue only comes from customers who actually convert, of course. The basic conversion rate equation is:
| Conversion rate = Total number of visitors who take an action / Total number of visitors |
Two elements control the success of paid online advertising campaigns:
The cost associated with running the campaign. There are usually two costs you must account for: the cost to drive traffic to the landing page, and the cost of designing and optimizing the landing page.
The revenue generated by the campaign as determined by its conversion rate, and the revenue generated by a conversion.
When creating a campaign, you will need to plan and budget for both of these elements. Several scenarios could affect the campaign’s profitability, so you have to consider the following questions:
An example may help show how these questions connect. Let’s say a company has been selling widgets in the traditional market for more than 10 years. Based on historical data, the company nets $75 of profit for each unit sold. The company decides to experiment with selling widgets online. The marketing team will run a pay-per-click (PPC) campaign that directs prospects to a landing page where they can place orders for the widgets.
In planning the campaign, the marketing team makes the following assumptions:
The widgets landing page should receive 100,000 visitors during the campaign.
The company never ran any paid advertising before, so it is estimating the campaign to start with a 1% conversion rate.
The profit a campaign is expected to generate is important when determining its marketing budget. In this example, the campaign is expected to generate $75,000 in profit:
| Number of orders = Number of visitors * Conversion rate |
| Number of orders = 100,000 * 1% = 1,000 orders |
| Gross profit = 1,000 * $75 = $75,000 |