Calculating Success - Figuring out ROI's - Part 1

June 5, 2010

Remember those word problems we used to have in school and how much you hated them?

If you’re in marketing whether that’s affiliate marketing or offline marketing, you’re involved in one big word problem all day long.  Lots of algebra and figuring out what the numbers need to be to make things work. I know most of you just throw campaigns up and see what happens with some basic targets to hit. But what if you had a good idea  before you started. You can test how different things would tweak your profitability. Have you ever done the math on a 10% conversion rate improvement? Or what about a 5% ctr improvement on one of you ads? How does that effect profitability?

In this series of posts I’m going to talk about the formula’s we use to figure out the math of marketing. I know it’s not something fun to most but it’s really interesting to see what little improvements can do in every step of the process. I’m coding up some calculators which I hope I’ll have done by the end of the weekend. Then you can just plug in your metrics and come up with some insightful answers without doing all this math.

Terms we’ll be working with:

  • Impressions = Number of times your add is shown
  • Click = vistor to your website
  • CPM = Cost per thousand impressions
  • CTR = Click Thru Rate, how many people click through and and or page
  • CPC = Cost per Click, how much you pay for each click
  • Conversion = takes some action like buying something, generating a lead. Basically something you make money one.
  • Conversion Rate = the percentage of people that come to a particular offer that turn into conversion
  • Payout = value of the conversion. I'm an internet marketer so payout is my lingo.
  • EPC = Earnings Per Click, how much you make for each click that comes to the offer page

I know for my advanced readers you already know all that crap but we have all types here. 🙂

In doing any math we like to find some common denominator and in my world it’s a click. In my mind I synthesize everything down to a click and what a click costs. In a lot of the marketing world that metric is eCPM, earnings per thousand impressions. But because I started in affiliate marketing that world is all about EPC. So we’re going to use clicks as our base metric.

Now we know our main metric is clicks lets talk about the most basic equation to profitability there is.

CPC < EPC, cost per click is less then earnings per click

In short if we’re buying media on a Cost Per Click basis,  like Facebook and Google Adwords offers, and we’re direct linking to the offer, meaning we’re using no in between presell page before the offer, if what we’re paying per click is less then what we’re earning per click HURRAY we’re profitable. Pretty simple right? Of course I wouldn’t need to write this article for that simple crap but I want to have a nice solid base to start from.

CPC is simple to calculate that’s just what you’re paying per click on the traffic source. Whatever that might be. But EPC is a little different, we can bring some more math into that side.

Payout * Conversion Rate / 100 = EPC
30$ * 10% / 100 ) = 3$ per click

What can we learn from this?

Well lets take a standard continuity product at a $30. If I offered you a 35$ payout or 11% conversion rate vs 10% which would you take?

lets do the math to calculate out the EPC

better payout first:
$35 * 10% / 100 = $3.5  per click

Now for the improved conversion:
30$ * 11% / 100 = $3.3 per click

Is that what you guessed? So basically a $33 payout is worth the same as a a 1% increase. As an affiliate network some advertisers think they’re going to fix their problems with increasing payouts a little bit. Most of the time they’re not willing to make a payout increase to fix a 4% conversion vs. 10%. So I just give them this equation so they can have a realistic expectation what they need to come in at.

Of course most of us affiliates don’t have to do this as we can find an EPC right in our affiliate marketing network. But it’s still nice to do the math sometimes, to figure out what numbers would have to do to be competitive. Now keep in mind also do these calculations with your own tracking systems or traffic source click count. Because, believe it or not there’s some networks out there that shave clicks to make your EPC’s look better. 🙂

Here’s an EPC calculator to play with.

Payout: $
Conversion: %
EPC: $

Sorry this was supposed to get a lot more in depth. However, I’m going to break it up into sections. Next will Be Calculating CPC from a CPM buy. In later posts we’ll build some calculators to calculate how a better CTR on a CPM buy can effect your profitability including the CTR of a presell page. I know I know we’ll get there. And as most of you know I don’t post much so I’m going to start writing all the articles now and release them a few days apart…….

On to the second.

Thanks for sticking with my, I’ve been super swamped running Ads4Dough but as I always say I’ll try and post more.


Want More? The more people listening the more I’ll write.
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