It can be surprisingly easy for companies to shell out cash for pay-per-click campaigns without actually knowing whether or not their spend is justified. The attitude may be, "Well it's just a couple hundred bucks, what could that hurt?" Or maybe it's, "We make $150 from a customer, so our cost-per-customer can be $150 or less."
The problem here is that it's not taking into account the time spent creating and maintaining PPC efforts. Further, it's also not justifying the amount spent on PPC vs. another platform. The more informed you are on the key metrics of your pay-per-click campaigns, the more ROI you will realize in the end; so let's get started:
Key Metrics Used to Calculate Customer Acquisition Cost
Monthly Allocated Budget
Much of the time, you will want to begin with an allocated budget. This may be tweaked as you calculate the cost per customer, but in starting with this metric you will get the best idea of what your return on investment will be.
If you're calculating cost based on a running campaign, take a look at the impressions you're gaining through your ads. If you're estimating, use previous ad data or research industry or payment amount averages. You may want to use your Google Webmaster tool as a base-level parameter for the specific keywords you're targeting as well.
Number of Clicks
The number of clicks you get on an ad is very important. This will be the determining factor for your click-through-rate, cost-per-click, number of leads, and ultimately your customer acquisition cost. If an ad is not getting clicks, you may want to consider tweaking the copy or targeting different terms. You may be competing with a high authority on the same terms, and therefore aren't appearing in the first page of results.
Spend a good portion of your time running through this statistic and working towards improvement. Ultimately, It is the leading factor for making or breaking your ROI on PPC.
Your click-through-rate will compare the number of clicks received by the number of impressions.
# of Clicks / # of Impressions = CTR
It's important to track your click-through-rate because it will help to determine whether your ad copy or design is effective and clear. It's safe to assume that if your CTR is really low that your copy may not be relevant for the search term that is driving impressions. On the other hand, if your CTR is very high, you may want to replicate your tone or design elsewhere or invest a larger monthly budget to benefit from these results.
Many PPC platforms will report on your cost per click. If this data is unavailable, determine your cost-per-click by dividing the number of clicks received by the allocated budget.
# of Clicks / Allocated Budget = CPC
Taking a look at your CPC may reveal a few things. For example, if your cost per click is very high, you may be utilizing keywords within your ad that are very competitive. It may also mean that you're not getting enough clicks for the amount you're budgeting. If you'd like to lower the cost of a click, you may want to find lower competition terms, remove terms that are driving high bounce rates or lower your bid amount.
Number of Leads
Assuming your PPC landing page includes a form that will capture a lead conversion, the number of leads will be determined by your visit-to-lead conversion rate (or the number of leads procured if your campaign is active).
# of Clicks X Visit-to-Lead Conversion Rate = # of Leads
In this case, a Lead is essentially someone who has said, "Yes, I am interested in a portion of your business." These are ultimately the prospects who you'll be focusing on in order to make a sale. As with any marketing tactic, tracking the number of leads captured from a PPC campaign is very important, because it will help you determine whether or not pay-per-click is an effective method of acquisition for your company.
To map out your CPL, divide your allocated budget by the number of leads gained.
Allocated Budget / # of Leads = CPL
This number to remain as low as possible. Since a lead is not a guaranteed sale, if you're not converting on leads, this will just be wasted money. It's good to be cognizant of your CPL and continually assess whether or not the price is worth the return.
Number of Customers Gained
Similar to the number of leads gained, you will calculate the number of customers gained using your average lead-to-customer conversion rate or use your active campaign data.
# of Leads X Lead-to-Customer Conversion Rate = # of Customers
Whether or not the numbers of customers gained through PPC is good or not depends on the value of a customer. For example, you may have only received one customer, but if they're shelling out thousands of dollars, this may be worth the spend. The number of customers will be important for your business, but is not necessarily the most accurate number to report on. Instead, you'll want to focus more on the cost-per-customer, as described next.
Now it's time to get to the nitty gritty. The result of this question may prove or disprove the value of PPC for your company. If the cost is higher than the amount made from a single customer, it may not be worth the spend.
To calculate your cost-per-customer, you'll want to divide the allocated budget by the number of customers earned.
Allocated Budget / # of Customers = Cost-Per-Customer
By this point, the cost-per-customer will show (based only on the actual budget) what you've spent in order to earn that customer. However, this is not including the time you've spent to create or track your PPC campaigns or the paid tools used, which can really add up.
Burdened Hourly Cost
Burdened hourly cost takes into account the overhead required to employ the workers on the account. For example, this would include the cost of the employees salary for that time, the cost of rent, taxes, insurance, tools, etc.
Check out this calculation how-to from the Houston Chronicle to determine your burdened hourly cost.
Final Customer Acquisition Cost
Lastly, and most importantly, you will want to total the cost-per-customer in addition to the sum of the time spent creating and managing PPC campaigns multiplied by burdened hourly cost to find your total customer acquisition cost.
Burdened Hourly Cost X Hours Spent on PPC Monthly + Cost-per-Customer = Customer Acquisition Cost
When all is said and done, you should have a total customer acquisition cost that is lower than the amount you'll make from a customer. If you're seeing a higher amount, consider whether or not you will continue to take in earnings from a particular customer. Often times in the B2B & technology spaces, customers offer more than a one-time transaction or are paying on a subscription basis and it will take up to a year or more to recover the acquisition cost before that customer is profitable.
If, in the end, it's important to determine how this cost compares to acquisition through all your different marketing channels so that you can allocate your budget towards the most effective tactics. If you're not seeing that ROI, you may want to consider whether PPC is the right platform for your product, or if there are areas where you can improve to see a higher return on investment.