Web Metrics

How To Convert Your Metrics Into Smart Marketing Decisions | Part 2 (Analysis)

Quickscan This Report

Test Number: #040502-SE

Word Count: 3800+ (16 pages)

Focus: 9 Questions

  1. How can you lose money even if your basic calculations are correct? (It is easier than you think.)
  2. How can you keep from miscalculating the cost of your pay-per-click campaign?
  3. How can you keep from miscalculating the revenue from your pay-per-click campaign?
  4. How can you cut through the confusion, simplify your analysis, and make the right pay-per-click marketing decisions?
  5. How can you cut through the confusion, simplify your analysis, and make the right content marketing decisions (for newsletters, white papers, etc.)?
  6. How can you keep from miscalculating your ROI — and seriously losing money? (6 Common Mistakes)
  7. How can you protect yourself against reporting errors caused by your metrics program? (5 Common Problems)
  8. How do you understand your log files?
  9. Why is it so difficult to interpret your log files?

Credits:

  1. Writer – Flint McGlaughlin
  2. HTML Designer – Cliff Rainer
  3. Contributors – Aaron Rosenthal

Preview the Next Experiment

Once your site is optimized, and your pay-per-click search engine campaigns are fully optimized, and once you are capturing the maximum available traffic, how do you continue to grow?

We are currently researching two key options.

  1. Google Page Rank: How can you use the free traffic from Google Page rank to lower your site’s overall cost per click? Which link strategies really work? How do you optimize the presentation of your content? How can you systematically improve your ranking? Does Google reward outbound links? How can you see all your related web pages within Google’s database (including free software that can help you)? How deep should you structure your navigation? How can you monitor your page rank on a daily basis? (And more.)
  2. Affiliate Programs: Should you outsource? Which vendors are best? Which software is best? What are the 10 most common tactical errors? How can you keep provider like Commission Junction from owning your affiliates? How do you truly incentivize your affiliates? How can you set up a low-cost test? (And more.)

We are also studying a systemized approach for developing strategic alliances, effective ways to mix online and offline promotions, and high yield opt-in email marketing.

Study the Data from this Test

How did one of our research partners generate a $5320.77 profit with their Google campaign, celebrate a 5.1 percent return on investment, double their budget, and then (much to their chagrin) discover that they actually lost 15.9 percent?

There is too much money “left on the table” with pay-per-click advertising. We overspend; we underspend. And even if we collect the right metrics, we often fail to analyze them properly.

As the Marquis of Halifax once noted, “A Prince who will not undergo the difficulty of understanding must undergo the danger of trusting.” (*1)

There is a lot of misplaced trust in the marketplace. How can the average “marketing prince” keep from losing money?

Our last (27-page) report was developed to help you collect the right numbers. The goal of this report is to help you simplify the time-consuming, tedious, overcomplicated process of analyzing those numbers.

How can you lose money even if your basic calculations are correct? (It is easier than you think.)

Okay Marketing Pro, here is a chance to test your analytics prowess. Study the following chart and identify which number is most likely to be incorrect.

COMPANY X – Analysis 1
Total Spent on PPC in March $6,402.53
Total number of Clicks 35,031
True Cost per Click $0.1827
Number of Orders Placed 297
Average Order Dollar Amount $56.66
Total Google Revenue $16,827.42
Margin after 60% Cost 40%
Total Google Profit $6,730.97
ROI on First Sale 5.13%

THE CASE OF COMPANY X

Most Internet marketers, at one time or another, have found themselves trapped in a peculiar conundrum: sales are up, but profits are down. And worse, the metrics look deceptively strong.

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It is a painful contradiction.

“We should be making money! Our search campaigns are growing; our Web traffic has spiked; our revenue has doubled — but we are still losing money.”

In more cases than not, careful analysis reveals that the crux of the problem is a faulty assumption.

The above chart was prepared for an online retailer that rapidly grew from annual sales of $500,000 to just over $1 million.

If you study the chart carefully, you may be able to detect the likely error. Only one of the nine key numbers is a general assumption.

The total clicks, cost per click, orders, average order, revenue, and so on are all relatively specific calculations. But the margin is just a general average of more than 1500 products.

It is a significant assumption.

And in this case, it is wrong.

3500 years ago, King Solomon warned: “As goods increase so do those who consume them.” His advice is still painfully apt for today’s business.

As this company grew, it experienced a rather typical margin creep. Product cost increased and operating cost increased.

The change was gradual (and difficult to detect) until the annual financials were prepared. That is when the CEO learned that while COMPANY X sold $1 million, they lost $100,000.

Once the margin was re-analyzed, the ROI was re-calculated as follows:

COMPANY X – Analysis 2
Total Spent on PPC in March $6,402.53
Total number of Clicks 35,031
Cost per Click $0.1827
Number of Orders Placed 297
Average Order Dollar Amount $56.66
Total Google Revenue $16,627.42
Margin after 60% Cost 32%
Total Google Profit $5,320.77
ROI on First Sale -15.90%

What You Need To UNDERSTAND: The first analysis was based on a 40 percent margin; the second analysis was based on a 32 percent margin. (*2) This company thought it was making money on its Google campaign, but in actuality, it was losing nearly 16 percent.The more money COMPANY X spends, the more money it loses.

So what can they do? The CEO of this group is experienced and effective. He was a Financial Analyst before he became an Internet retailer.

  1. He has frozen all but the most profitable SE campaigns.
  2. He is re-evaluating his costs.
  3. He is eliminating unprofitable product lines.
  4. He is refocusing on his core offering.

We are quietly cheering for him.

How can you keep from miscalculating the cost of your pay-per-click campaign?

Our problem is not always spending too much; sometimes we spend too little. Take a moment to review this ROI chart:

RESEARCH SITE A – With AVERAGE CPC
“Calculated” Spent on PPC $7,006.20
Total number of Clicks 35,031
Average Cost per Click $0.20
Number of Orders Placed 297
Average Order Dollar Amount $56.66
Total Google Revenue $16,827.42
Margin after 60% Cost 40%
Total Google Profit $6,730.97
ROI on First Sale -3.93%

If we assume the margin is correct, then what could possibly be wrong with this data?

It seems reasonably precise, but it contains a minor yet significant assumption. According to the chart, the average cost per click is 20 cents.

This is an accurate number. But it is the wrong number with which to evaluate your economic performance.

An average is insufficient. It is better to calculate the EXACT cost per click. This is accomplished by dividing the money spent by the number of clicks.

Here is the difference:

RESEARCH SITE A – With TRUE CPC
Total Spent on PPC in March $6,402.53
Total number of Clicks 35,031
Cost per Click $0.1827
Number of Orders Placed 297
Order Dollar Amount $56.66
Total Google Revenue $16,827.42
Margin after 60% Cost 40%
Total Google Profit $6,730.97
ROI on First Sale 5.13%
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What You Need To UNDERSTAND: When SITE A calculated ROI with an AVERAGE cost per click, it over-reported costs and under-reported profits. The difference was nearly 9 percent.

A mistake like this can cost you. Spending too little on a campaign can be just as wasteful as spending too much.

In either case, you are just serving your competitors. (*3)

How can you keep from miscalculating the revenue from your pay-per-click campaign?

All marketing is not direct marketing, and although it is possible to cash flow each month on your pay-per-click campaign, it is important to calculate the ANNUAL return on your marketing investment.

Would you reinvest in this campaign?

“Your Company”
Total Spent on PPC in March $6,402.53
Total number of Clicks 35,031
Cost per Click $0.1827
Number of Orders Placed 297
Average Order Dollar Amount $56.66
Total Google Revenue $16,627.42
Margin after 64% Cost 36%
Total Google Profit $5,985.87
ROI on First Sale -6.51%

Although at first glance this ROI seems horrific, we should consider that these numbers do not account for two important buying events:

  1. Those customers who come to the site, exit it, and then return to make a purchase.
  2. Those customers who make a purchase, and then return to make yet another purchase

It is a mistake to ignore these two events. If funds are limited (and they often are), you may be forced to recover all of your investment within the first 30 days of your billing cycle. But the value of a customer equals more than the value of a first sale.

And while we find it impractical to calculate the mythic LIFETIME value of an average customer, we do find it helpful (even critical) to determine the ANNUAL value of an average customer.

Armed with this number, you may discover that your money is well spent on a campaign that cannot completely pay for itself with the first sale.

Let’s review a slightly modified version of this chart:

“Your Company” with a 16.7% Customer Return Rate to Site
Total Spent on PPC in March $6,402.53
Total number of Clicks 35,031
Cost per Click $0.1827
Number of Orders Placed 297
Average Order Dollar Amount $56.66
Total Google Revenue $16,627.42
Margin after 64% Cost 36%
Total Google Profit $5,985.87
ROI on First Sale -6.51%
ROI with Customer ReturnRate of 16.7% 9.11%

What You Need To UNDERSTAND: If you factor in repeat orders, this campaign moves from a negative return of -6.51 percent to a positive return of 9.11 percent.

Marketers often fail to consider the true financial impact of single digit returns. If you compound this 9.11%, you could achieve an annual return of 161 percent.

Important Disclaimer: We have expert financial analysts on our staff at MEC, and we do recognize the many assumptions in this projection, but we are just trying to make a single salient point.

  • Don’t underestimate your campaign’s true ROI, and don’t underinvest in your growth.

Consider the (probably safer, but clearly anemic) options:

Compounded ROI vs. Other 1 year Investments
National best 1 year CD 2.33%
Average Savings Account 1.38%
Average Jumbo Savings Account(95K plus) 1.44%
1 Year U.S. Treasury Note 1.74%
1 Year LIBOR 1.40%
National best Money Market 2.30%

If you can fine-tune your marketing, so that you can (1) accurately track reorders, and (2) accurately measure campaign results, you can develop a solid investment strategy for growing your company.

But, how can you consistently monitor your campaign results? How can you prevent reporting errors? How can you cut through the confusion, simplify your analysis, and make the right pay-per-click marketing decisions?

Section 2 (Continue…)

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