Cost Per Conversion in PPC Advertising
Wikipedia defines Cost Per Conversion as an advertising and marketing term, describing the cost of acquiring a customer, typically calculated by dividing the total cost of an advertising campaign by the number of conversions. The definition of “conversion” varies depending upon the situation; it is sometimes considered to be a lead, a sale, or a purchase.
What is a Good Cost Per Conversion?
One question that will typically arise when talking about cost per conversion is: what is a good cost per conversion? Is it $5? Is it $10? Is it 20$? Or perhaps a good conversion is measured by a percentage of spend as it relates to your average sale value — so is 5% a good ratio between pay-per-click (PPC) advertising spend and revenue generated? Is 10%? Or perhaps even 20%? There is no real hard and fast answer to this, but many of our clients here at JumpFly like to use 10% as a solid measuring stick, in case you were looking for a typical ratio. So if you know your average order value is $100, you would look to get your conversion costs around $10 per order.
However, there are other factors that you should consider before deciding upon an acceptable cost per conversion. For example, how much is a new customer actually worth? How many times does a customer order from you within a year? If you know that most of your customers just order from you once and they rarely, if ever, order from you again, then you can use a flat 10% of average order value as a good benchmark for your conversion cost goal. But if you know the average customer orders from you 3 times a year, 5 times a year, or even more, then you really should factor that in to your cost per conversion goals. You may be short-changing your growth if you don’t consider what the total true value of a new customer is worth. You may be willing to push that conversion cost ratio to 20% of average order value, for example, if you know the average new customer orders at least twice from you within a year.
What is the Value of a New Customer?
The value of a new customer is different for everyone, so you should look at your own average order value and the average number of purchases made by a typical customer before you make that final decision on what your cost per conversion goals are.
What is a new customer worth, especially in these tough economic times? Only you can decide for your business, but they might just be more valuable than you think.
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