Measuring Online Advertising Return on Investment

By far the most common type of online advertising is pay per click advertising. There are also many other forms of online advertising, including pay per lead, traditional banner advertising, paid directories, classified web advertising, web links, video advertising and many more. For small firms with limited marketing budgets, the challenge is knowing which type of advertising will produce the highest return on investment. However, advertising and promoting products and services online can become hugely expensive, because many webmasters simply don't understand the options and pitfalls. Consequently, many business owners have 'dabbled in pay per click' advertising, and got no sales leads in return. Perhaps you have already paid to advertise in a 'business directory' and got very little interest?

Pay per click advertising it's a form of online advertising, which allows you to bid on any key phrase that users type into major search engines. Your advert usually appears in the 'sponsored results', (and only appears if the user has typed in the search term you have actually bid on). You only ever pay when someone clicks on one of your adverts. Once they click on your advert, they will be redirected to your own company website. There is an unlimited range of key phrases to choose from. Advertisers will only be interested in bidding on key phrases that match up to their product or service offering. Every key phrase has a market value, which is dictated by its popularity. The top position has the highest bid, the second place the next highest bid, and so on.

As a general rule 80% of users only bother to bother with the first three sponsored listings results. This means the 'cost per click' rises exponentially in the top three positions. Auctions for key phrases are in real time and never stop. Over time, the market value for each key phrase stabilises at a certain cost per click, based on competing advertiser's collective commitment to spend money on a search phrase.

Such is the dominance of semantic advertising, that traditional forms of online advertising, (such as paid inclusion and banner advertising), are rapidly dwindling away. There is clearly still a role for paid inclusion across 'authority' websites. Adverts posted on quality, related websites are likely to convince your target audience to click through to your own business website. However, the ability to track and profile a user by their search history, then semantically match and display an advertisement, is incredibly powerful. Thanks to semantic advertising, web users search patterns have now become the most influential factor to a web advertiser.

If you knew that for every £1 you spent on pay per click advertising, you would be guaranteed to get £2 back in sales, you would just keep throwing money at the campaign. Of course, the reality never works in this way. Despite having tracking tools, (which compute 'average cost of clicks' and 'number of click throughs), many business owners fail to see any return on investment. They get fed up, and convince themselves it could never work for them. So why is it working today for millions of other commercial organisations?... The critical success factors are as follows:-

• Calculating Return on Investment - if you don't know how to calculate your break even point, you will not know when you've succeeded or failed in making a profit! However, to accurately calculate the figure, you must     have access to statistics over a long period for:-
  • Cost per click
  • Number of click throughs
  • Number of quotes
  • Numbers of sales
  • Margin per sale, per unit

The final metric is particularly noteworthy, as it represents the maximum amount of money you could theoretically spend per click, on a key phrase. Of course, no organization can enjoy a 100% sales conversion rate. So next you need link your average conversion rate %, using the percentage of quotes converted into sales during a recent campaign. If your average conversion rate is, 50%, and your margin per sale unit is £10, then your breakeven point is £5 per unit, per click.

However, you will have to trial and error to determine the conversion metrics above. For instance, if there is a long lead time between lead generation and sale, any clicks incurred during the period will have to be paid for. In other words, you can only plan ahead by looking backwards, to indicate the number of clicks, the average cost per click, and the number of sales generated as a result. It means 'burning money' to see what ads and bids make a reasonable rate of return, and which ones don't. It is one of the main reasons why advertisers get fed up. They just don't risk enough time to verify whether the return on investment is large enough.

• Effective 'Call to Action' - it never ceases to amaze how many paid adverts have been created by advertisers which, once clicked on, are redirected to a broken page that doesn't exist. Almost as bad are web pages that do not promote something related to the key phrases bided on. Half the battle is writing a persuasive advert, which provides users with instant gratification and clear instructions on what to do next. If you're 'landing page' on your own company website, does not have a phone number or 'get a quote' button (or some other 'call to action') - all your best online advertising campaigns will be in vain. The sales message must be simple, short with bullet points and easy to understand. In the above example, a 50% sales conversion rate was used to highlight a single metric. However, a more realistic conversion rate would be between 5% to 10% (depending upon the market sector competition and how powerful your website proposition is).

• Compelling Products and Services - don't forget your actual offering has to live up to your advert promise. If you have managed to attract the right kind of prospects to your website using, you must have a real product or service to deliver. This sounds pretty obvious, but many users will click on advertisements and compare the offerings of competing websites. So make sure it is worth investing in online advertising the first place. Most firms primary aim is to ensure repeat business, from customers who trust you and your offerings. Many advertisers will even bid at a loss, to earn more repeat sales in the future. Just make clear what you have to offer is likely to be purchased by satisfied customers, again and again in the future.

It is possible to outsource complexities of online advertising to a third party. If you are considering employing the services of an online advertising agency, qualify their sales claims and credentials carefully. Internet marketing is largely an unregulated discipline, in which anybody can position themselves up as an 'expert'. Check for any professional qualifications of their employees and ask for references from satisfied customers. Don't just take their word for it. Actually speak on the phone to their existing customers, whom are willing to share their experiences.

Remember that online advertising media consists of a variety of different techniques, channels and price ranges. Your agency should have the common sense to apply the appropriate advertising channel to your business. For instance, if you can only sell your products or services locally, it would be a poor use of your money by paying to let your pay per click advert to appear outside your geographic catchments. It is possible to be highly selective and targeted towards specific postcodes and towns. This will save vast sums of an advertising budget from unnecessary clicks.