Online marketing has become essential to do business in the internet age, but many businesses are paying over the odds for marketing. It’s notoriously difficult to calculate return on marketing spend, but I have created a mathematical formula that works well to benchmark spending.
Formula for return on marketing investment:
( ( [Number of impressions] / 100 / 100 ) * [Price of product] )
– [Cost of campaign]
The formula is quite similar when paying per click:
( ( [Number of impressions] / 100 ) * [Price of product] )
– [Cost of campaign]
The formula depends on two assumptions:
Firstly, that online ads will have an average click-through rate of 1%. This means that for every 100 people who see the ad, one will click through to the website.
Secondly, that 1% of visitors to the website will buy the product.
Studies have shown that click-through rates vary from around 0.5% to around 3%, averaging at around 1%. Conversion rate studies show a greater variance (from less than 1% to 8%), but I have found 1% to be a reliable benchmark.
In this example, I am paying £1,000 for 100,000 impressions and selling my products for £30 each:
100,000 / 100 / 100 = 10 expected sales
10 * 30 = £300 sales value
£300 – £1000 = -£700
As you can see, this deal would result in a loss of £700 if I were to accept it. For this deal to be viable it would have to cost less than £300 (£0.003 per impression).
Formula for maximum price per Impression
[Max Price per impression] = [Price of product] / 100 / 100
[Max Price per click] = [Price of product] / 100
It’s often more useful to look at the amount paid per impression or per click. Using this formula you can calculate a break-even price based on the price of your product.
For a product that costs £30:
[Max Price per impression] = £0.003
[Max Price per click] = £0.30
For a product that costs £100:
[Max Price per impression] = £0.01
[Max Price per click] = £1
If your product sells for £100 and you are spending more than £1 per click or £0.01 per impression, you are probably making a loss on your marketing spend!