Information we, as PPC managers, need in order to build out profitable campaigns.
Most businesses share a common goal in venturing into PPC—Profit. The profitability of PPC campaigns is a clear indicator that should be used to gauge the success of the overall account.
Anyone responsible for spending money to generate revenue should have a way to determine if their activity is actually generating business.
In order to calculate what is profitable for a particular business, we need these key metrics:
Calculating Breakeven ROAS is essential for PPC marketers to gauge profitability of the campaigns we manage. The crucial variable to determining breakeven ROAS is average profit margin. The formula to determine your breakeven ROAS is 1 / Profit Margin.
For example, if you determine that your average profit margin is 30%, your breakeven ROAS would be 1 / .30 which equals 3.3. Multiply that by 100 to get a percentage, and you get 333%.
Essentially, what this means is that if you generate more than 333% ROAS, you are making money...anything less and you’re losing money.
Knowing your profit margins allows us to calculate your breakeven ROAS unique to your business and optimize your campaigns for maximum profitability.
2. Sales Team Conversion Rate (This applies to lead generation)
How much you pay for a form submission, or call, that turns into a sale is crucial for us to determine a profitable CPA (cost per acquisition).
Let’s take a step back—for us to calculate a profitable CPA, we need to determine what your breakeven CPA is; essentially what you can afford to pay for a lead.
In order to do that, we use the following formula:
Average Profit Per Sale x Sales Conversion Rate
For example, if your average profit for sale is $175 (after accounting for cost per goods and overhead costs) and your sales closing rate is 15%, we multiply 175 x .15 which equals to 26.25.
That means you can afford to pay $26.25 per lead...paying anything more than that amount would mean you aren’t profitable.
3. Lifetime Value
Lifetime value is a long-term way of looking at which customers are worth the most by calculating the projected revenue a customer will generate over their lifetime.
Accounting for LTV, or Lifetime value, in your PPC strategies can result in you getting the most valuable customers in the most cost effective way.
These occurring instances of business from a previous customer highlights the fact that your month to month CPA is not the final, all encompassing metric. Factored into your overall strategy, the average LTV of a customer can increase your profit margins and in turn, decrease your breakeven ROAS.
To learn more about the ROI formulas I used here, check out this really great article written by my agency’s founder.
