Use Profit As Your Guiding Metric - Other Standard Metrics Are Flawed

| Posted: 11-10-2007 | Comments: 0 | Views: 13 | Rating: (59)

(?)

An incredibly important, and often overlooked, aspect of measuring the effectiveness of your online advertising is using profit as your guiding metric. So what does that mean?

To understand this, I first want to point out how the other metrics that most online advertisers are using today, including ROI, conversion rate, etc., are flawed. I want to work through an example here that will demonstrate why profit is the best metric to use when making online advertising decisions.

Our example is a company that sells TVs online and has three keywords that comprise their PPC campaign: flat screen TV, plasma TV and LCD TV.

Keyword 1: Flat Screen TV; Keyword 2: Plasma TV; Keyword 3: LCD TV.

This company is using cost per conversion to make all of their keyword decisions. This metric is also known as the cost per acquisition or CPA. This is a very common metric that a lot of advertisers use today. The decision logic is based on the following question: "How much money do I spend on a particular keyword to generate a sale". The logical conclusion is that the best keyword is the one that costs the least to produce a sale.

In this case, the advertisers know a little bit about their business. They know that, on average, if they spend over $300 to generate a sale, they are not profitable. Therefore, when looking at their keyword performance, they look at any keyword that has a CPA above $300 and attempt to eliminate it. If we ask them to pick their best keyword of the three here, they would certainly choose (as I am sure you all would agree) Flat Screen TV as their best keyword. Why?

Because it converts for less than $300, and it is the cheapest converting keyword they have.

If I was able to show this advertiser just a little more information, their opinion could change. Let's say I was able to show them the actual sales price the keyword was able to generate. Would it change the assumption of what was their best keyword?

Based on the assumptions listed in the second example above, the keyword they thought was best is now only generating a $1000 sale each time it converts. Whereas, the other two keywords, which they chose to eliminate, generate sales of three times the value. Knowing these two keywords actually drive a much higher sales price, it completely changes the decision logic where Plasma TV, with this added insight, now appears to be a better keyword. Yes, it has a higher cost per conversion than they thought they could allow, but that was before they knew it drove a sales price three times what they were accustomed to receiving.

While Plasma TV now appears to be the best keyword, the advertiser is still not making decisions based on complete information. With one more piece of critical information, they would be able to make the perfect decision. What's missing here is actually knowing which exact product was sold and its associated margin. Simply understanding that I brought $3000 in revenue is nice, and it can be helpful, but if you are like most retailers out there, you are selling products that have different margins, and that is a key factor in determining the ultimate profitability generated by each keyword, online ad and campaign.

Based on the product and margin information from the third example listed above, we get an entirely different picture once again. The keyword that initially appeared to be the worst, LCD TV, because it has a high cost per conversion and appeared to be the second best option because it had the same sales price as Plasma TV, now is proven to be the best keyword. Why? The answer is simple: LCD TV has a higher margin than the other 2 products, which more than offsets its higher CPA.

By adopting the frequently used, industry-standard CPA approach, the keyword that was thought to best for their business turned out to be unprofitable and the worst keyword for their business. In turn, the keyword that was initially thought to be the worst for their business ended up the most profitable.

This advertiser would have eliminated their two most profitable keywords, and they would have funneled all of their ad dollars to the one keyword that on the surface level looked like it was the best, as measured my cost per conversion, but, in reality, was losing $95 for their business every time it generated a sale.
This leads us to the fundamental premise of this article - many industry-accepted practices for measuring online advertising effectiveness are flawed and can lead to sub-optimal, if not unprofitable, online investments.

Sophisticated marketers use profit as their guiding metric because it is the only metric that, in all business and Internet advertising, does not lie. It does not lead to the question: "Yeah but, could it mean this or could it mean that?" When you understand an ads profitability, you have the final answer.

Rate this Article:

Current: 0 / 5 stars - 0 vote(s).

Article Tags: Internet, Online Marketing, Sem, Search Engine Marketing, Pay Per Click, Online Advertising

Article Source: http://www.articlesbase.com/sem-articles/use-profit-as-your-guiding-metric-other-standard-metrics-are-flawed-232360.html

Print article

Send to friend

Publish this Article

Author feedback

About the Author:

Adam is the Chief Revenue Office at ClearSaleing. He is a seasoned sales manager starting insides sales teams at Google and Actuate Software. Adam holds a B.S.B.A. in Marketing from The Ohio State University. ClearSaleing

Submitting articles has become one of the most popular means of generating quality backlinks and targeted traffic to your website. Join us today - It's Free!

Article Comments

Add new Comment

A Proven 5 Step Methodology to Earn Maximum Profit
By: Adam Goldberg | 11/10/2007 | SEM

Cut Through the Complexity and Implement an Alert System
By: Adam Goldberg | 11/10/2007 | SEM

Use Search Queries As A Basis To Derive New Keywords And Negatives
By: Adam Goldberg | 03/10/2007 | SEM

Understand Critical Customer Buying Behavior and Patterns - Build a Data Warehouse
By: Adam Goldberg | 12/10/2007 | SEM

Connect Your Offline Sales To Your Online Advertising
By: Adam Goldberg | 03/10/2007 | SEM

Search Engine Marketing
By: ajay | 10/10/2007 | SEO

X Files of Online Marketing
By: Erkan Meydanlioglu,Mr | 10/10/2007 | Online Business
Online Business related articles, learn how to start your very own Online Business from these great articles published here for free.

A Guide to Google Adwords
By: Tracey Simpson | 30/07/2007 | Online Promotion
Online promotion related articles for use on your website. Internet marketing experts adive on getting the most out of your online promotion web site.

Got a Question? Ask.

Ask the community a question about this article:

Frequently Asked Questions

I have one phone line and two house. I want set ...
By: Hari Kant | 01-09-2008
I have one phone line and two house. I want set two or three reciever with each home and want they work like a EPBX or intercom facility.

Is black hat seo illegal ? If you ask my opinion ...
By: alifar | 31-08-2008
Is black hat seo illegal ? If you ask my opinion no See: Is black hat SEO illegal ?

Question About Ordering Hi-Speed Internet Service Through Verizon
By: Janel | 30-08-2008
I have a problem: I ordered hi-speed internet service through Verizon yesterday (not Fios, just hi-speed). The person I spoke with at Verizon said that they have to send someone to my apartment to do wiring in the phone jack to set up the hi-speed internet because i had previous phone service. I had previous phone service with Comcast, but it was not connected through the phone jack. It was connected through the cable. I do not have that service any longer. I have not ever had any phone connection to my phone jack. I live in an apartment, so it is possible that a previous resident did have some type of phone service, but I don't know. They will be charging me to come out to do the wiring. I want to know if this is necessary. Also, they told me that I need to purchase a modem and a router. I am really confused. I don't know and feel like they are adding more money than they need to.

Modem Problems
By: sobriquetika | 30-08-2008
how do i restart my verizon DSL modem??

I am planning to disconnect my home phone service ...
By: mona | 29-08-2008
I am planning to disconnect my home phone service and need to find out how to connect to the internet without a phone. I do have Direct TV.

Email recovery
By: karen | 28-08-2008
i have a dell computer and i permently deleted some important email. i have yahoo email and aol email. my server is aol. is there a recovery disk available that works or a way to recover this lost information?? thx Karen

Q&A Powered by:

Latest SEM Articles

4 Principles of Effective Search Engine Marketing Strategy
By: Jinger Jarrett | 14/10/2008
Creating an effective search engine marketing strategy doesn't have to be a chore. By considering your readers, formulating a successful marketing strategy, and examining the different ways searchers find information, you can create an effective search engine strategy that brings you targeted traffic and more sales.

Dominate Your Work At Home Opportunities With Article Marketing
By: Juhani Tontti | 14/10/2008
The power of article marketing comes from the nature of the Net, which is ran by information. This offers a great opportunity to build a dominance with certain search terms for your work at home opportunities using self-written, original articles.

SEO Consultants, Who Are They And What Do They Do?
By: Joel Mclaughlin | 13/10/2008
Trying to find a talented person to get your website to the top of the search engines can be hard. A talented SEO consultant with search engine optimization experience is needed to perform the job properly.

Search Engine Marketing Consultants And Experts Are In Demand
By: Joel Mclaughlin | 13/10/2008
Search Engine Marketing Consultants and Experts help you to grab top rankings in the search engines. Finding a talented agent isn't easy, but we have some great tips for you.

How To Get Social Networking Traffic For Free
By: Garey Simmons | 12/10/2008
Of course, your strategies may vary with the policy of each site. Some will allow you to do some limited promotion of your products and businesses and others won't.

Online Classified Ads Can Bring Free Traffic
By: Garey Simmons | 10/10/2008
Newspapers are what we typically associate with the standard classified ad. However, Internet classified ads can be far more effective at sales and generating traffic to your website. Classified ads on the web give people instant gratification when they choose to buy or click a link, unlike a newspaper.

How to Build the Right Social Media Network for Driving Website Traffic
By: Deepak Dutta | 09/10/2008
Are you spending too much time at social media sites like digg, facebook, stumbleupon, etc. to drive web traffic? Have you seen any substantial results from your efforts? You are not alone. Thousands of people try to promote their websites using social media tools and fail miserably due to the lack of a solid plan.

4 Killer Article Marketing Tactics To Grab More Enthusiasts For Your Online Home Business Opportuni
By: Juhani Tontti | 09/10/2008
You will get more motivated visitors for your online business opportunity, if you think the whole article marketing process piece by piece. By doing the details right, your online business opportunities grow both their visitor numbers and quality.

More from Adam Goldberg

Website Analytics vs. Advertising Analytics
By: Adam Goldberg | 25/06/2008 | Technology
It is possible to use Outlook as a CRM tool, but most companies choose an application like Salesforce or Siebel. It's possible to use PowerPoint to do graphics, but most companies choose Photoshop for their graphics needs.

The Death of the Address Bar & What This Means to Search Engine Marketers
By: Adam Goldberg | 23/05/2008 | SEM
Remember when you used to navigate to a Web site by typing the URL into the address bar? You'd start by typing http. Then, you evolved and skipped using the http and just entered www. Now, you simply go to the search engine of your choice and type the company name you are looking for.

Lower Your Click Through Rate to Achieve Better Performance
By: Adam Goldberg | 25/02/2008 | SEM
Tips on achieving a better rate of clicks in online advertising.

Understand Critical Customer Buying Behavior and Patterns - Build a Data Warehouse
By: Adam Goldberg | 12/10/2007 | SEM
Before I discuss why you should build a data warehouse, let's make sure we are clear what a data warehouse is. I spent several years at Oracle, so I was very familiar with databases and building data warehouses.

Cut Through the Complexity and Implement an Alert System
By: Adam Goldberg | 11/10/2007 | SEM
Let's first talk about why you should implement an alert system. First, large and sophisticated companies' PPC campaigns probably contain tens of thousands of keywords.

A Proven 5 Step Methodology to Earn Maximum Profit
By: Adam Goldberg | 11/10/2007 | SEM
This is a disciplined methodology to ensure we are systemically improving the profitability of our customers online advertising investment.

Connect Your Offline Sales To Your Online Advertising
By: Adam Goldberg | 03/10/2007 | SEM
All large companies do some percentage of sales over the phone. If you are unable to tell where that phone call came from, and I'm not talking about knowing it came from your Web site or even knowing that it came from Yahoo versus Google, it's not good enough.

Use Search Queries As A Basis To Derive New Keywords And Negatives
By: Adam Goldberg | 03/10/2007 | SEM
To start off, let's talk about what the ideal strategy would be or what the ideal tool would look like for creating new keywords and negatives. I, personally, would love a tool that could recommend a keyword to me and accurately tell me what the ROI on that keyword is before I implement it. Wouldn't that be ideal?

Article Categories

Article Marketing

Article Notepad

Stop Duplicate Content

Term Papers

Need Help?

Sign up for our email newsletter

Receive updates, enter your email below

Use of this web site constitutes acceptance of the Terms Of Use and Privacy Policy | User published content is licensed under a Creative Commons License.
Copyright © 2005-2008 Free Articles by ArticlesBase.com, All rights reserved. (0.20, 17)

Use Profit As Your Guiding Metric - Other Standard Metrics Are Flawed

Article Comments

Related Articles

Got a Question? Ask.

Latest SEM Articles

More from Adam Goldberg

Need Help?

Site Links

Webmasters

Business Info

Sign up for our email newsletter