To very loosely paraphrase a famous line from the movie Wall Street, “Math, for a lack of a better word, is good. Math is right. Math works. Math clarifies ..”. As you can see, I’m fond of math. As one of the marketers here at Cardinal Path, I get the connection between the very technical side of analytics and the business/marketing side of things. Sometimes, the connection is a difficult one for some people to grasp how pennies and visits impact their bottom line. I’d thought I’d spend a little time outlining some of the basic math of online marketing and how small changes can make a huge difference.
Let’s say we have an e-commerce website that on average generates $15,000 per month in sales based on 100,000 unique visitors per month. From those two pieces of information we can create a very simple metric:
- For every unique visitor, we will make $0.15 (Assuming that all traffic; paid or “free”, spends at the same rate)
This is a start, but this doesn’t really tell us anything of value yet. How much did it cost us to get those 100,000 unique visitors? Let’s assume we haven’t engaged Cardinal Path to help out with SEO or SEM (Hey, I’m a marketing guy, I have to throw in a plug or two) and we are paying on average $0.08 per visitor using AdWords to get half of our monthly visitors and the rest come from organic search results (which isn’t too shabby). Now, we have some numbers to play with …
- Half the visitors are “free” (assuming search engine rank and resulting traffic doesn’t change – in fact, it does all the time)
- Half the visitors cost $4,000 ($0.08 x 50,000)
Of course, we are making some big assumptions: no salaries, taxes, etc. Now, we’ll factor in the cost of goods sold. Let’s say that the cost of the product sold is $5,000 (or 33%).
- Net monthly profit of $6,000 ($15,000 – $4,000 – $5,000) and an ROI of 66.6% (For a net monthly profit of $6,000, we spend $9,000)
Now here’s where we can illustrate how incremental changes can make significant impact on the bottom line. Let’s run through a few scenarios:
Scenario – AdWords Spend Variations
What if we spend a little less on AdWords to save ourselves some money? Let’s assume the traffic derived from an AdWords campaign is evenly weighted and we spend $1,000 less per month. That means we will have 37,500 paid visitors plus the “natural” 50,000 from organic search. So, those 87,500 visitors, based on our previous metric of revenue of $0.15 per visitor, should generate gross monthly sales of $13,050. The cost of the product sold is roughly $4,307 giving us:
- A net monthly profit of $5,743 ($3,000 AdWords + $4,307 Cost of Goods sold)
As you can see, in this example, spending less actually hurt our bottom line – or did it? In the original scenario, we had an ROI of 66.6%, but in this scenario our ROI is 78.6%. Here’s how it breaks down:
- Net profit of $5,743 versus costs of $7,307 ($3,000 AdWords + $4,307 cost of goods sold) gives us an ROI of 78.6%.
Why does the ROI go up in this instance? It’s actually quite simple, in this example we have a base of 50,000 “free” visitors that account for $7,500 in gross monthly revenue. If we decided to spend nothing on AdWords, we would end up with a net monthly profit of $5,025 ($7,500 gross revenue – $2,475 cost of goods sold) and an ROI of $203%.
I set up this example to give a weird twist and to highlight how “free” traffic based on sound SEO practices can lower our cost per acquisition and thus increase monthly profits.
Scenario – Organic Traffic Drop
In this example, much of the revenue is based on the “free” organic traffic and we could spend nothing on AdWords and still net out in a profitable position. What if our search engine position(s) dropped and our 50,000 monthly organic visitors drops to 40,000 visitors?
- Gross revenue is $13,500
- Net revenue is $5,045 (Gross revenue – $4,455 cost of goods sold – $4,000 AdWords campaign)
Ouch! That stings a little. As we could have probably guessed, given a revenue per visitor of $0.15, a loss of 10,000 visitors would result in a $1,500 loss in gross revenue.
What if we wanted to maintain our gross revenue of $15,000? How much would more would we have to spend on AdWords to get back to that number and would there be any impact on the net revenue?
To get back the lost $1,500 gross revenue, we would need to pay for 10,000 more visitors ($0.15 x 10,000). This would cost us $800 ($0.08 x 10,000). So:
- Cost of goods sold remains the same at $5,000
- AdWords spend becomes $4,800
- Net revenue is now $5,200
What if we wanted to get back to our original net revenue total of $6,000? To save you the pain of seeing more math (don’t worry, there’s still more coming), we would need to spend about $7,720 in AdWords for 96,500 visitors to get to an approximate $6,000 net revenue.
I think this really highlights the value of organic traffic. Losing 10,000 organic visitors has cost us an extra $3,720 ($7,720 new budget – $4,000 original budget) per month to maintain our net revenue.
Scenario – Optimizing AdWords Campaign
Let’s now assume you’ve hired Cardinal Path (Sorry, another shameless plug) to help with your AdWords campaign. I know we can work miracles, but for the sake of simplicity and to continue the theme of incremental changes, let’s say the end result is that the cost per visitor goes from $0.08 to $0.07 and we spend the same $4,000 per month. We end up with:
- 57,143 more paid visitors per month for a total of 107,143 visitors
- At $0.15 per visitor revenue, we end up with gross monthly revenue of approximately $16,072
- After factoring in cost of the product sold and AdWords spend, the net revenue equals $6,768
So, a seemingly meaningless saving of one penny per visitor has resulted in an increased net monthly profit of $768.
Now let’s take a trip towards the dark side. Let’s assume that increased bid competition has caused the price of our AdWords average bid to increase to $0.09 and we’ll assume we are spending the same $4,000 per month.
- 44,444 paid visitors for a total of 94,444 visitors for the month
- At $0.15 per visitor revenue, we end up with a gross monthly revenue of approximately $14,167
- After factoring in cost of the product and AdWords spend, the net revenue equals $5,492
So the moral of my long winded and math indulgent post is to value your pennies and protect your organic traffic. It is amazing how pennies (soon to be extinct here in Canada) add up. I should really start picking them up when I see them on the sidewalk.