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Plus Report - By Thomas Baekdal - June 2012

Calculating the Return on Investment of Your Advertising Campaign

Too many marketing managers don't follow the money all the way to a transaction. They just calculate the cost per click and as such neglect to consider that only a fraction of each click actually results in a sale.

Too many brands buy online advertising the same way that they did with print. They buy it based on level of exposure instead of real things like how many products are likely to sell. In the past, this was measured against the number of times an ad was exposed to the readers. Today, we do something very similar, we just measure impressions and click-throughs.

But the problem with all of this is, that it doesn't tell you anything about how much money you will actually make (or won't make) from advertising. Most brands still don't follow the money, and it is causing all kinds of problems in other areas, including in social media. Brands get caught up on boosting engagement, sometimes by using fancy tactics that are actually lowering your conversion rate. I wrote much more about that in 'Social Conversion Rates: Where The Real Value Comes From'.

We also see it with brand blogs, where brands are more concerned about page views than actually converting readers into customers. Instead of posting insightful and inspiring content, they post funny pictures of things completely unrelated to your brand's purpose.

Exposure, click-throughs, engagement, and page views are all very nice things, but they are all a means to an end. They are not the end itself.

The following is my simple guide for calculating the actual value of display advertising, and more so, what the maximum allowed CPM or CPA/CPC (cost per action/click) can be.

First, you need to ask yourself five simple questions:

  1. What is your revenue per transaction? Let's say it's $99
  2. How much of that is cost? Let's say it's half: $50
  3. What is your online conversion rate per referred visitor? Let's say that is 5%
  4. How much of your profit are you willing to lose to advertising in return for a sale? Let's say that's 10%
  5. What is your click-through rate? It's usually 0.5%
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Thomas Baekdal

Founder, media analyst, author, and publisher. Follow on Twitter

"Thomas Baekdal is one of Scandinavia's most sought-after experts in the digitization of media companies. He has made ​​himself known for his analysis of how digitization has changed the way we consume media."
Swedish business magazine, Resumé


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