However, this calculation does not take into account the additional cost associated with the new medium (online marketing). The marketing team has to plan for additional costs, which include:
Let’s assume this project will have a fixed cost of $15,000 to handle items 1 and 2 (design, software, and optimization costs):
| Number of orders = Number of visitors * Conversion rate |
| Number of orders = 100,000 * 1% = 1,000 orders |
| Gross profit = 1,000 * $75 = $75,000 |
| Cost of design and software = ($15,000) |
| Gross profit = $60,000 |
So, the company is left with $60,000 to cover the cost of acquiring visitors. How much should the company spend to acquire these visitors?
The company can spend all of its profit, $60,000, and not lose any money. Based on the competitiveness of the vertical, the cost per click to acquire a single visitor to the landing page varies. We have seen clients spend as much as $15 per click. Since this is a new market the company is planning to penetrate, it is willing to spend up to 40% of possible revenue to acquire visitors:
| Possible investment to acquire visitors = 40% * $60,000 = $24,000 |
We use the following formula to determine the average cost per click in a campaign:
| Cost per click = Campaign budget / Number of visitors |
| Cost per click = $24,000 / 100,000 = 24 cents per click |
So, if the marketing manager is bidding on a PPC campaign, his average bid should not exceed 24 cents per click to remain within the $24,000 budget. Table 2-1 shows how changing the average bid per click will have an impact on the bottom line for the campaign. With an average bid of 24 cents per click, the campaign will generate $36,000 in profit. However, if the keywords are more competitive and the team has to increase the average bid per click to 48 cents, the campaign profit will go down to $12,000.
|
First campaign, with 24 cents per click cost |
Second campaign, with 48 cents per click cost |
|
|
Total number of visitors |
100,000 |
100,000 |
|
Pay per click |
$0.24 |
$0.48 |
|
PPC spending |
$24,000 |
$48,000 |
|
Number of orders |
1,000 |
1,000 |
|
Profit per order |
$75 |
$75 |
|
Total profit from orders |
$75,000 |
$75,000 |
|
Campaign budget |
($24,000) |
($48,000) |
|
Additional costs |
($15,000) |
($15,000) |
|
Total profit |
$36,000 |
$12,000 |
Table 2-2 shows that the company can pay up to 60 cents per click without losing any money. Paying more than 60 cents per click will put the campaign in the red. Of course, in some instances companies decide to spend money on a losing campaign because their business strategy is to try to capture or enter a new market. It is also normal for companies to increase their average bid per click when a campaign starts, and then slowly reduce it over time.