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Digital Marketing Formula

In this video I describe the digital marketing formula. A calculation you can use to predict your return on investment for a Google Adwords search or paid digital marketing campaign.

Transcript

Hey guys, it’s Calin Yablonski here from Local Academy. Today I’m going to be talking about the digital marketing formula, which is a simple formula that you can use to predict the revenue or the sales that you’ll actually generate from a digital marketing campaign. Let’s jump right in and take a look at the formula.

For starters, the first thing that you have to identify is your budget, so the amount of money that you’re going to be investing into your digital marketing media buy. Every platform, Google, Facebook, Twitter, LinkedIn, all of them allow you to advertise today on our audiences. However, you have to pay them a small fee for that. Again, the first item is figuring out what your budget is going to be for your digital marketing campaign.

What you’re going to do is you’re going to take that budget and you’re going to divide by your cost by click, or your CPC. This is the money that you’re actually going to pay to Google each and every time a person clicks on your AdWords address. Some people may not know this but the ads that appear across the top and down the right hand sidebar of any Google search result, you can actually pay to be in there. You’ll pay a small fee to the search engines, to Google, every time somebody clicks on them. Taking your budget and dividing it by your cost per click is going to essentially tell you how many people are going to be visiting your website, because don’t forget, a click is a person. Your budget divided by your cost per click will give you the amount of people who are visiting your website.

Now you’re probably thinking how the heck do I find out what my cost per click is going to be? Luckily there’s a really handy free tool that you can use to find out what the cost per click will be for your target keywords. You can visit adwords.google.com/keywordplanner, the URL that I have at the top of the screen there, and after you’ve created a free account you can use the keyword planner to search for some of your terms and phrases. What you’re going to be looking at here is what the suggested bid is. The suggested bid is going to tell you what your average CPC is going to be, roughly, for that keyword. Looking at the example here we can see Calgary flower shops are in the $5.06 range, whereas flower shops in Calgary are $2.64 per click. That’s a really simple way to find out what you’re going to be paying per click for your keywords using Google AdWords.

Now that we’ve found our budget and divided it by our cost per click we’re going to multiply it by our conversion rate. A conversion can really be anything but in this context we’re going to talk about it in terms of a sales lead, so somebody visiting your website and potentially either calling you or filling out some type of online contact or request a service form. Your conversion again is going to be the percentage of people who take a desired action on your website. The way that you can find this number is you take the number of website visits and you divide it by the number of conversions.

For example, if you have 100 people who visit your website and three of them convert, that would leave you with a 3% conversion rate. Now you may be wondering, what’s a typical conversion rate for my niche or my industry. That’s a really difficult question to answer. In most cases I like that to say that a typical conversion rate is going to fall somewhere between 1 and 3%. We’ve seen conversion rates much, much higher than this, in the 15 to 20% range, but we’ve also seen conversion rates lower than this, so in the .25 to .5% range. What I would suggest is that somewhere between 1 and 3% is going to be that sweet spot for your business.

The other thing to note is that when you’re running a Google AdWords campaign you should be able to monitor what your conversion rate is. It’s a little item that you can configure within your accounts to tell you what your conversion rate is. I’ll put up a link to an article that you can read on configuring your conversion tracking within Google AdWords.

Once we’ve found our budget, divided it by our cost per click and multiplied it by our conversion rate, we’re then going to multiply it by your internal closing rate. That’s the percentage of projects you sign from incoming leads. How you find this number is you take the number of leads that you’re generating for your business and divide it by the amount of signed projects from those leads. For example, if you have ten leads come in and they convert into five projects, then your conversion rate would be 50%. Last but not least we’re going to multiply it by your average transaction price. This is the average price of the products or services that you’re going to be advertising.

If you’re sticking with me so far, now that I’ve gone through the different components of the formula let’s take a look at a specific example. We can see that with a budget of $1,000 and a CPC of $2, and a conversion rate of 3%, an internal closing rate of 50%, and an average transaction price of $2,000, your initial investment of $1,000 would translate into $15,000 in sales. Let’s look at this in a little bit more detail so that you can see how fluctuations in these numbers, both up and down. Has a dramatic impact on your revenue or your total sales.

For starters, our original formula, $1,000, we divide that by 2. That gives us 500 visits to our website, multiplied by our conversion rate which is 3%. That’s going to leave you with 15 conversions, so those would be sales leads. Let’s say you close half of those at 50%. That gives you 7.5 leads multiplied by 2,000 which is your average transaction price, for a total of $15,000 in revenue.

Now what’s really cool here is that as you can see, if you increase your budget by 100%, so if you double it to $2,000, everything else being equal, you can see the dramatic impact it has on your total sales. It jumped up from $15,000 in our original formula to $30,000 in our second formula just by doubling our budget. Now let’s see what happens when we decrease our CPC. Everything else has stayed exactly the same but we’ve decreased our CP C or our cost per click by $1. You can see now the impact that it has on the formula. Our total sales are still at $30,000 and all we’ve done is decreased our cost per click to $1. The reason that this has such a big impact is that when you take $1,000 and you now divide it by $1, you’re going to get 1,000 clicks as opposed to 500. All else being equal, you’re actually going to double your sales simply by decreasing your cost per click.

Now the obvious next question is how the heck do I do that. That’s typically just part and parcel to a Google AdWords optimization where you’re looking for terms and phrases that are still converting at the same rate but that you can pay a lower cost per click to bid on. That’s why the optimization process whenever you’re looking at a Google AdWords campaign is so dramatically important because it ultimately has a huge impact on your total sales.

The next item here is looking at your conversion rate. What happens when you increase your conversion rate by 100%? Again, going back to the original formula, everything has stayed the same but we doubled our conversion rate from 3 up to 6%. What you’re starting to see here is that as soon as you double your conversion rate or double your budget cut your cost per click by 50%, you’re going to effectively double the amount of revenue that you generate for your campaign.

The obvious next question is how do I increase my conversion rate by 100%. Admittedly, increasing a conversion rate by 100% when you’re already starting at a 3% conversion rate would be very, very difficult to do. It’s typically accomplished through a process called conversion rate optimization. This is where you’re sending traffic to a landing page or a page on your website that you’re testing multiple variations of things like your headline, your page content, your imagery, and your call to action in an effort to find the variations that are going to convert at the highest rate. If you have any other questions about conversion rate optimization, please feel free to let me know. I may make a video about it in the future but I don’t want to go into too much detail about the process here today.

Now last but not least is what happens when you increase the performance of the first three items. What happens when you double your budget, decrease your cost per click by 50%, and increase your conversion rate by 100%? You can see that it results in this compounding effect, where looking at our original formula we had $15,000 in sales, and in this example we actually saw an 800% increase. That’s why I believe that taking a holistic approach to digital marketing is usually the best solution where you focusing on increasing your budget your budget where it makes sense, decreasing your cost per click through the continued optimization of your search marketing campaign, and increasing your conversion rate through the development of landing pages and the testing of those pages.

One quick word of caution is that as you’ve seen in this example, the compounding effect that happens through increasing your budget, decreasing your cost per click, and increasing your conversion rate, it also works in reverse. If we were to decision our budget by 50% or increase our cost per click by 100%, or decision, again, our conversion rate by 50%, what we would see is effectively a splitting of our total sales. Our revenue would drop in this example, in the original example, from $15,000 down to about 7,500. I wanted to show you the positive aspects of this but also be fully aware that these compounding effects work in reverse as well.

I hope that you’ve found this brief tutorial valuable. If you have any questions, please feel free to tweet me at @CalinDaniel, and for more information on digital marketing tactics and techniques for local business owners, please join us at www.localacdemy.co. I’ll talk to you soon. Thanks.

Calin is the founder and lead strategist at Inbound Interactive. He is responsible for the development and execution of Inbound's search marketing strategies.

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