As a marketer, you should know how much you spend to get each click on one of your ads. That basic cost per click (CPC) metric is at the core of digital advertising.
The lower the cost per click, the better, because it means that you’re driving more traffic to your website at a lower total advertising cost.
But if you really want to understand how your CPC relates to business success, the other thing you should work to understand is what a click is worth. Once you know what each click is worth, or a “revenue per click”, then you know how effective you are at turning those clicks into customers.
Calculating Click Value
To calculate the value in revenue dollars per click, you need to work backwards from revenue.
Let’s say a particular marketing campaign produced 1,000 sales at $100 per sale, that’s $100,000 in revenue. Then let’s say your conversion rate (defined here as the percentage of visitors that ended up buying from you) is 1.00%. That means you get 1 sale for every 100 people who visit your website. And if each sale was worth $100, then you make $100 in revenue for every 100 people who visit your website.
All that means that each click (which brings a potential customer to your website) is worth $1 to your business. This is your click value, or revenue per click.
What Can You Afford to Pay?
Once you know your click value, you know what you can afford to pay for each click.
Using the example above, where each click on your ad is worth $1, you can better judge your cost per click. If the CPC is $2, you know you’re losing $1 with each click. If this is the case, you are going to go out of business.
If the CPC is $0.50, you’re making $0.50 after marketing costs for each click. This is a more sustainable model.
Knowing what you can afford to pay for each click not only lets you judge current performance if gives you a roadmap for future optimization of the campaign.
Read more: Facebook Is Changing The Way They Measure Cost-Per-Click