The Three Tiers of a PPC Campaign

ROI, CPA, CTR, CPC”¦these are all metrics that you can use to evaluate your pay-per-click (PPC) campaign.  The amount of data available to you can be overwhelming (so can the acronyms, defined below).  The challenge is determining which of these are true key performance indicators (KPIs) and why they matter.

A three tier structure organizes PPC campaign metrics by level of importance.  Tier One metrics represent the most critical data, while Tier Two and Tier Three metrics do not demand as much attention.  It’s not that certain metrics are irrelevant.  All of these metrics should be analyzed and acted upon in order to improve your PPC campaign success. However, a three tier structure places PPC metrics in order of how well they reflect the success of your PPC campaign.

Here is a look at each tier as a KPI with an example that demonstrates the relevance and importance of the information.

Tier One: Success Indicators

Return on Investment (ROI): The amount of money you are receiving for every dollar that you put into the campaign.  ROI is defined as revenue minus costs divided by costs and can be calculated as a dollar amount, percentage, or ratio.

This metric is extremely important because it shows the value you are getting from your campaign.  In other words, for every dollar you are putting into the campaign how much are you getting back?  It may cost you $20 per conversion, but if your ROI is not reaching your goal then does Cost Per Acquisition (CPA) really matter?  ROI is the ultimate metric to determine how well the campaign is doing.

Conversions: The number of predefined goals that you have setup for the campaign that are completed.  For example, you may consider a conversion to be whenever a user fills out a Contact Us form.  Conversions can also be known as leads.

You run a PPC campaign to qualify visitors as potential opportunities.  So this metric should be with ROI at the top of your concerns.  You can tell your boss that the Click-Through Rate (CTR) of the campaign was 3%, but who cares if clicks do not turn into conversions.  For most businesses, lead generation should be the goal of running a PPC campaign.

Conversion Rate: Conversion rate is defined as the number of conversions divided by the number of clicks and is calculated as a percentage.  In other words, the amount of clicks that turn into conversions.

Conversion rate, more than CPA, determines how well you are generating leads.  Ideally you want every click to turn into a conversion.  Conversion rate specifically tells you the percentage of clicks that turn into leads.  Let’s say your ads are clicked 500 times for a cost of $500.  Two of these clicks turn into conversions for a CPA of $250.  This may or may not be a good CPA to a company, but you do know that the conversion rate is less than stellar at 0.40%. This metric tells you how well you are doing at converting your visitors into leads.

Tier Two: Tactical Measurement

Cost Per Acquisition (CPA): Defined as cost divided by the number of conversions and is calculated in currency.  CPA can also be known as cost-per-lead and is how much the conversion (lead) costs.

CPA is a significant metric, but it can sometimes be misleading.  If your company’s average sale is $10,000 and you spend $5,000 a year on PPC, your ROI is still positive if you make only two sales.  On the other hand, your CPA would seem to be very bad at $2,500 ($5,000/2 conversions).  But CPA is in the eyes of the beholder.  Paying $2,500 per lead might not matter to a company because the revenue received from the sale far outweighs the cost.  Lower CPAs will always look better, but a high CPA is not always bad.

Click-Through Rate (CTR): CTR is defined as the number of times your ads are clicked divided by the number of times your ads are seen (known as impressions) and is calculated as a percentage.

Though CTR can be calculated at the keyword and text ad level, it really is a measure of how well your keywords relate to your text ads.  In other words, does your ad entice a user to click it? If your CTR is 0.01% (clicked once out of every 100 impressions) then you probably need to assess the structure of your campaign.  Are your ad groups segmented enough?  Are your keywords present in your text ads?  Do your text ads have a clear call to action? CTR is a major factor when finding the answers to these questions.

Tier Three: Useful Information

Cost Per Click (CPC): CPC is defined as the cost divided by the number of clicks and is calculated in currency.  This metric tells you how much you are paying each time a user clicks your ad.

Say you spend $100 and your ads are clicked 20 times.  Your CPC is $5 ($100 / 20 clicks).  What does this metric really tell you?  So what if the average cost of one click is $5.  Did you get any leads? CPC does not tell you this metric nor does it tell you how relevant your ads are.  A lower CPC looks better than a higher one, but as long as you get the lead what is the difference?  With more and more businesses creating PPC campaigns every day the competition for page one listings is going to be that much greater, causing your CPC to most likely increase. (It’s worth remembering that your ad ranking is not solely determined by how high you bid.  See an explanation of Quality Score.)

Conclusion

The success of a PPC campaign is determined by its results.  CEOs do not care how much a keyword costs.  They want to know if leads are being generated and if these leads are turning into revenue.  Too often, too much emphasis is placed on the simpler Tier Two and Tier Three KPIs rather than on the more complex Tier One indicators.  This three-tier structure articulates where priorities should lie.

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2 Responses to The Three Tiers of a PPC Campaign

  1. […] up on my last post, an immensely valuable resource that can further hone the success of your pay-per-click (PPC) […]

  2. […] how many of your clicks turn into conversions.  Conversion rate, as I have previously written about, is a tier one success indicator of how well your campaign is doing.  Give your users an […]

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