Pay per Click or PPC, is an Internet advertising model in which advertisers pay the publisher when the ad is clicked. It is simply the cost of getting an ad clicked. It implies how effective an advertisement was, in terms of the clicks it attracted. PPC has been a widely accepted model of Internet advertising because of its obvious fairness to the advertiser-he/she only pays when a potential customer clicks on the ad.
A PPC ad is displayed if the query keywords match the keywords in the advertiser’s list, or when a content site displays relevant content. They are called sponsored links or sponsored ads, and appear above, beneath or along the organic results on search engine, or anywhere on the website wherever the owner wishes to display the ad.
The following infographic shows the importance of PPC:
Though working of PPC is simple enough, calculating its value or benefits is a little difficult. Every advertiser wants maximum eyeballs and subsequently maximum sales for every rupee spent on advertising. But how do we calculate what a PPC advertisement is worth? First let’s understand what “Return on Investment” means. More generally, return on capital or an investment is calculated as: (Profits-Cost)/Cost*100. If ROI is positive, it means your investment is earning you some value. If it’s negative, you’ll ultimately go bankrupt as you are eroding your investment. There are multiple techniques to measure returns for PPC. We discuss them below. Return on Ad Spend (ROA) is a measure which calculates return from ad spend and is calculated as:
(Sales from PPC – Costs of PPC)/costs of PPC
Let’s take an example. Mrs. Sharma has a beauty salon for which she had used Google Adwords to increase the publicity and sales. Let’s assume that the sales generated are $1000 and PPC costs are 200$. ROA will be 400%.
However, before the Mrs. Sharma can begin feeling happy about the returns, let’s look at her costs once again. Apart from PPC costs, there are a lot of costs, which are not accounted for. Take for example, credit card processing costs, customer service costs, maintenance costs or salary to a neighborhood boy for managing her Adwords account. This gives us Return on Investment or ROI, which is a better measure of calculating return.
In our example above, if she consider the above costs, her costs increase to $800, making ROI 100%.
As is true for all investments, we should not just stop at ROI. Consider the objectives of PPC. PPC aims to maximize sales by generating maximum visitors at minimum possible costs. Choosing the right keywords that trigger your ad, getting ads in front of searchers, and turning visitors into buyers-these factors also affect the sales and costs of PPC. Also, this model is open to abuse through click fraud, although measures have been taken to curb it. This should be kept in mind if you see a lot of clicks but a low conversion rate. Let’s look at some other measures to calculate return for PPC.
Click Through Rate (CTR), calculated as clicks/impression*100 is another measure which calculates how many visitors, who viewed the ad clicked on it. Impressions are number of views an ad gets. Since the first positive action that a potential customer takes is clicking the ad when he views it, CTR is a good measure of how attractive an ad is. Higher the CTR, better it is as a higher CTR implies more clicks per impression, and more clicks lead to better chances of conversions. Continuing our example, assume clicks to be 10 and impressions to be 200. CTR would be (10/200)=0.05 or 5%.
Let’s look at another measure to calculate the returns. Profit Per Impressions (PPI) computes the profit, that is the different between revenue and costs, divided by the views an ad garners. It is calculated as:
Every single impression can generate a sale. Taking impressions as a metric thus makes sense. In our example, Mrs. Sharma’s profit would be (200/200)=$1.Isn’t it low compared to a return of 400% that we calculated earlier? Let’s continue.
There is till another measure which can be used to measure the return, and that is Cost per Conversion. Now, a conversion can mean different things to different advertisers. It might mean a sale for some, but a sign up for a newsletter for some. If 100 people viewed Mrs. Sharma’s website from the ad they clicked on and 10 contacted her for more information, then her conversion rate would be 10%. Because an ad’s ultimate objective is to generate sales or conversions, cost per conversion is a good metric to measure your return on ads.
Now, you maybe wondering that why do we have so many measures? In the end, we should test our ads on their capacity to generate sales, right? But let’s see the difference, advantages and disadvantages of each measure now.
Return from ad spend
Simple and basic calculation, starting point
Does not factor in impressions or clicks
Clicks per Impression
Effectiveness and attractiveness of ad
Doesn’t factor in costs
Profit per Impression
Cost per Impression
Profit from each impression
Does not account for investment
Cost per impression
Direct metric, easy to interpret
Doesn’t factor in average sales
All four of these measures interpret different things and make use of different metrics too. To get a holistic view of returns and value of amount invested, Mrs. Sharma should consider all these measures. In our example, though returns on amount spent on ads was 400% but her profit per impression was as low as 1$ and CTR of 5%. Also important is not to look at these numbers in isolation. Mrs. Sharma might be thinking, is this PPI for $1 good or bad? And should she be happy or sad? One way can be to wait for some time and observe the trends in these metrics. Ideally, she should work on increasing her impressions along with increasing profits to benefit maximum from her amount spent.
Learn the art and science of digital marketing and be a part of digital India movement. Our digital marketing courses are delivered by marketing & advertising industry experts. Best of in class and online digital marketing training courses in Gurgaon & Jaipur.
About us and this blog
We are a full service agency that deliver compelling digital marketing solution. Our winning solutions and experience helps to deliver great results across several key areas.