Setting Business Goals for Performance Marketing

by Dan Walsh

I’ve never read an AdWords or paid marketing book that broke these important concepts down for newbies… So here it is.

The students in my marketing class have been running paid search campaigns for a week or two now. They didn’t really care about performance when they were posting free tweets and Instagram pics, but now that they’re spending money they think more critically about it. One question keeps coming up: “Is this good?” They want to know if their cost-per-clicks are too high, or if their click-through-rates are too low. They’re looking for a channel-wide benchmark from which to gauge performance. Unfortunately there isn’t one. The only answer to their question is “that depends”. It’s a crappy answer, but it’s true. Here’s why.

Whether I pay $100 or $1 for a click on my ad all depends on my business goals. If I’m selling cheap cans of dog food then $100 is way to much. If I’m selling Porsches then I could probably pay even more than $100. This all depends on a host of other factors, like the ratio of people who click your ad (cost you $100) and don’t buy your Porsches (wasted money?), but it’s mostly determined by constraints set within the company.

This is all probably business 101, but having never taken a business course I had to learn it the hard way. Let’s say I sell cheap dog food. Every time someone buys my can of dog food they pay $1. That $1 is my revenue. If I sell 10 cans of dog food then I have $10 in revenue. Now let’s say it costs me 25 cents to make that can of dog food at my factory. That 25 cents is the fixed cost of the product. The difference between the cost of the product and price at which I sell it is my potential profit. In this case it’s 75 cents, or 75%. When it’s a percent, it’s called profit margin.

But I can’t sell my dog food if no one knows about it, so I need a marketing budget. As a business, I decide that I want to keep half of my revenue as profit. I get $1 in revenue per can of dog food. I want to keep 50 cents as profit, and I spend 25 cents to produce it. This leaves 25 cents for my marketing budget. This means I should spend no more than 25 cents to get someone to buy a can of my dog food. If I spend more than 25 cents, then I’m dipping into my 50% profit margin.

So how does this inform my paid search campaign?

Not everyone who clicks my ad will buy my dog food. Maybe they wanted turkey dog food and I only sell beef. Maybe they don’t like my site design. It doesn’t matter, they still cost me money every time they click my ad. Let’s say 1 out of every 5 people who click my ad buys a can of my dog food. That’s my conversion rate: 20%.

According to my business goals, I only get 25 cents to market and sell a can of dog food. I have to spread this 25 cents out over all the clicks it takes before someone actually buys a can. 25 cents spread evenly over the 5 people who click my ad before 1 of them buys, leaves me with 5 cents per person.

5 cents is the maximum I can spend per click and still meet my business goals.

If I pay 15 cents per click I’ll break even. 15 cents times 5 clicks is 75 cents marketing cost per can of dog food sold. I still have to pay 25 cents to make the can. 75 cents + 25 cents is $1, which is what I sold the can for. Break even.

If I pay 20 cents per click I’ll actually lose money. 20 cents times 5 clicks is $1. Plus the 25 cents it costs to make the can means I spent $1.25 to only earn $1 in revenue.

There are many ways to adjust a marketing campaign, but it’s impossible to know which way to adjust if you don’t know how well you’re doing. The only way to know how well you’re doing is to set business goals and compare marketing performance to those goals.

Here are the steps:

  1. Determine desired profit margin.
  2. Calculate marketing budget per unit sold, based on profit margin.
  3. Calculate maximum spend per click, based on conversion rate.
Here is the math:

Budget per Unit Sold = (Profit Margin x Product Sale Price) – Cost to Produce Unit

Conversion Rate = Number of Buyers / Number of Clickers

Max Spend per Click = Budget per Unit Sold x Conversion Rate