Introducing the PPC conversion triangle

Ever struggled to explain how the PPC bidding model works? Ever been questioned by your boss on why you can't "just make it cheaper, and get more!"? Here's a model that should help to answer those difficult PPC questions. The PPC Conversion Triangle simplifies the very complex nature of a pay-per-click bid model.

Watch the video, or read the transcription below... (because we're nice like that!)

Hi, I’m Richard. I’m Head of Digital Strategy here at WMG. Today we’re going to be talking about the conversion triangle. Now, the key thing about this: it’s going to take an extremely complex product, such as paid media, be it on any channel, be it on AdWords, be it on Bing, be it on Facebook. I’ll break it down to an extremely simple bid model using this very simple formula, which I’ll come onto in a second.

Why use the PPC Conversion Triangle?

So, why do we do this? A, it’s to capitalize on top performance. If we’ve got some really strong keywords that are performing incredibly well in terms of conversion, we want to make sure they’re not hanging around at the bottom of the page.

Secondly is we want to reduce wastage, so if we’ve got some key phrases that are up there at the top, we want to be looking at them on an individual basis. Are they actually converting very well? Have they got an extremely high cost-per-acquisition? Break that right down to this very simple model.

The Figures

• Cost Per Acquisition

First off, we want to be looking at the figures. We want to be looking at cost-per-acquisition. Where do we get this cost-per-acquisition from? The very simple formula to work out is how much have we spent, how many conversions have we got, divide that against that, and we spit out a cost-per-acquisition.

Now, working that one step backwards is where do we actually get our targets from? If we’re working within e-commerce, what we want to be able to do is work to a certain percentage of average order value. Quite often, most of our clients work to about 10%, some down to 5%, some up to 20%. It completely depends on your model. But if we work to this, this is how we can work out an e-commerce conversion.

The next bit being a lead generation model. Now, this is slightly different, because we need to be able to look at overall, we need to convert into a sale at £100. So we know that 1 in 10 conversions works into a sale, so we need to be working to about £10 cost-per-acquisition or cost-per-lead.

• Conversion Rate

Next bit, conversion rate, which is the next part of the triangle down here. Nice and simple. We take the total number of conversions that we’ve received, divide it by the amount of traffic that’s been at our website or the number of clicks; that spits out our conversion rate.

• Cost per Click

Third bit, cost-per-click. Nice and simple. How much have we spent? That total media spend. Divide that by the number of clicks we’ve had onto the website. Great.

The PPC Conversion Triangle

Now, looking at the triangle itself, the one key thing in this formula that we need to work to is your cost-per-acquisition is your cost-per-click divided by your conversion rate. So if I know that I’ve got a target up here of £100 cost-per-acquisition, and I know that at the moment, I’m getting a £1 cost-per-click, that’s what Google’s telling me that I need to be paying. I can look over here at the conversion rate and I can say right, I need at least a 1% conversion rate or I’m not going to hit my target up here.

Just to break that down to an example I’ve pulled together down here, we’ve got a corner sofa. The phrase “corner sofa” at the moment within Google, it’s telling me it’s about £1.45 cost-per-click. I know that my website converts at about 0.8%, so I can see straight away that that’s going to be a £181 cost-per-acquisition.

Now, that might be too high, might be too low. Let’s say that I need to be working to about £150 cost-per-acquisition. So we can take the cost-per-click, leave that exactly the same, come down here – I need to increase my conversion rate to 1% to get down to this £145.

Influencing the Figures

How do I do that? Coming back up to the PPC conversion triangle, looking at the cost-per-click, first off, we’ve got bidding. It’s a simple bidding model. I can bid less – I might not get as much traffic through to the website, but if I bid less, that cost-per-click is going to come down.

Looking at the quality score. A lot of people going on about quality score. We’ve got a video coming up about that, how to influence quality score, later on. But looking at this quality score, if I can get from a quality score 2 to a quality score 5, in theory, my cost-per-click is going to be coming down.

Looking at the conversion rate. I can go back to landing page testing. So I know that 1 in 10 people that currently land on my website convert. Some people might think a 10% conversion rate, that’s great, but why is it not 15%? Some simple tests over here on the landing page – is the form nice and easy to fill in? Are the buttons big enough and bold enough? Have we got the call to action? Are we making the most of our USPs? That can come back to your landing page testing.

The second bit is your keyword optimization. By that, I don’t mean the bids; I mean the sorts of phrases that you’re matching against. If I go and have “corner sofa” on broad match, I might just match against the phrase “corner sofa,” but I might also match against a phrase such as “how can I fix my corner sofa” or “I’ve got a tear in my corner sofa.” So what we need to make sure is that the traffic that’s coming through to the site is as relevant as possible, and that’s going to be increasing the conversion rate up here.

Now, the cost-per-acquisition, obviously everybody has a cost-per-acquisition target. E-commerce, coming back to this relationship over here with the 10% of average order value as an example, we can either influence that 10%, so actually, I’m going to go do about 15% of average order value just to try and get those cumulative sales through. Or I can increase my average order value.

From a lead gen point of view, it’s a slightly different problem. What I need to be able to make sure is that if I know, going back again to the previous example, that 1 in 10 of my leads that comes through is converting into a sale, what can we do on the back end to get that up to 2 in 10, 3 in 10? Do that, you go from 1 in 10 to 2 in 10. All of a sudden, you can double your cost-per-acquisition.

Takeaways

Now, just to summarize what we’re talking about, then: we want to come back to this triangle and just talk about an extremely simple formula. These two figures are the only things that actually make any difference to this. Volume is negligible in this scenario. If I can reduce my cost-per-click, I don’t have to worry too much about my conversion rate, and vice versa: if I can increase my conversion rate, I don’t have to worry too much if somebody starts bidding more aggressively than me.

So that’s the end of the little tutorial that we’ve done today. We’ve got a few more videos coming up, and what we’ve done is we’ve put together a little conversion calculator for you. You can have a play around with it and see how your own campaign is doing. Thanks very much.