It has to be easier than this:
The above formula is for the cost and Value per Click from a presentation of leading web experts. Their lecture, in Rio de Janeiro, was an abstract on the value of a click. (“A Predictive Model for Value-Per-Click,” Sodomka, Lahaie, Hillard, May, 2013)
There is an easier, gentler way to measure the value of your clicks, and your customers. It is also much more useful, and powerful, than the model above.
Do You Want to Make a Profit?
Now that you have answered that question to the affirmative, I hope, read on. Profit in any business is simple. It is revenue minus expenses. If you want to succeed, make sure the value of this number is positive. These are easy, academic statements. Now, ask most business owners and managers what their profit-per-customer is, or what the profit-per-click on their web based links or ads is, and watch their eyes glaze over. Let that not be you.
Without such essential information, whenever you sell products or services online, your business is playing a trial and error game that you may lose. Increase your odds of consistent success by understanding three simple, and easy to calculate, steps to arrive at your firm’s “value-per-click” figure.
Each step is necessary, and progresses to the nest step: revenue-per-click, cost-per-click, and value-per-click.
When someone clicks on an ad, post, link or other traffic source and ends up on your website, how many of those people result in sales? For how much revenue? And for how much revenue-per-click (RPC)?
Here is a simple calculation using a hypothetical scenario. You can customize these figures to fit your own business, but this scenarior will be used for consistency throughout this article.
Say, for example, a Facebook ad campaign provided almost all of the website traffic for “your” new e-book site. The ad campaign sends 1000 visitors to your site monthly. From these 1000 visitors, you sell 20 e-books for $50 each, for a total of $1000 in revenue. The revenue-per-click is simple: 1000 clicks = $1000 revenue. So, “revenue-per-click”=$1. See below…
1000 visitors => 20 sales at $50 for each sale
20 x $50=$1000 revenue
$1000 revenue / 1000 visitors = $1 RPC
This is a very simple calculation, but a powerful one. Few business owners could tell you this figure off the top of their heads, even though they probably should have it written in marker on the front of their foreheads if they don’t remember it. It truly is that important. It is the starting point for all that follows. Remember the beginning, “Do you want to make a profit?”
Admittedly, this e-book website example is very easy to calculate: in addition to the simple numbers that are used, there is no “product cost” for the book since it is digital – you don’t have costs for the paper, printing, etc. After being written and its website built, ongoing costs are zero. Zero, except advertising, that is. Advertising, and promotions, cost money. This can be measured per click, also.
Cost-per-click, or CPC, is how much its costs you to get a click-through (someone clicks) from a Facebook ad, or any of the other paid methods used to bring people to your site. CPC, and the management of this cost, has been the subject of so much media coverage that there isn’t time to review it here. Simply put: advertising costs money. Website owners get the luxury of being able to use online metrics and know exactly how much it costs per visitor. In other words, they get to know their CPC.
Let’s revisit “your” new e-Book website again. Suppose you still pay $750 for your Facebook ad campaign and it consistently produces 1000 click-throughs to your website per month. What is your cost per click? Again, pretty simple math: $750 ÷ 1000 = $0.75
While there is, and will be, unending debate about “reasonable” cost per click, the $0.75 in this example is a very ordinary figure.
Value per Click
This most essential figure is actually the easiest to calculate, if you know the other two figures. This is where revenue-per-click and cost-per-click come together.
Per our previous examples:
Revenue per Click: $1.00
Cost per Click: $0.75
Value per Click: $0.25
Remember our formula for profit? Revenue minus expenses. “value per click” is the “per click” expression of profit, or “value.” Armed with this information, smart website owners can excel at their business by using this calculation as a decision-making tool.
Putting Value-per-Click to Work for You
Why is value-per-click (VPC) so important? It is pervasive. It affects every decision you make. By knowing how much a visitor is worth, you can estimate a fair value for advertising to acquire new visitors (CPC, etc). You can see if there are profit margin concerns, perhaps a need for an add-on, up-sell, or back-end products so you can maintain a sustainable profit.
Let’s return once more to the e-book website example. Per above, your value-per-click, is $0.25. That’s a 25% profit margin. Not bad. You also know that you receive 1000 visitors per month. Your profit per month is $0.25 x 1000 = $250. Sure, it’s a simple site you spend only a few hours a week on, but just $250?
The 25% profit margin doesn’t seem so spectacular now, does it? $250 a month? You can make that in one shift a month as a good waiter. Unless you ramp up the scale of the operation (and have the up front funds to do the advertising), your e-book site will not have you living large.
Remember: you can’t take percentages to the bank. Or spend them to grow a business. Having had your eyes opened, what can you do? Lacking additional funds, you spend more time on social media monthly and drive another 1000 visitors to your site, using more engaging organic social media posts, for example. You increase your revenue with add-ons or up-sells. If 5 out of your 20 buyers per month added, say, an audiobook version for an additional $50, and 1 buyer out of the 20 added your new “one-on-one coaching” with you (1 hour per week for $199.99), where would you be?
Here are the figures:
- 2000 visitors now (1000 paid, 1000 organic) = 40 buyers per month. Not 20.
- Ad cost is still $750 for the first 1000 ad clicks. Free for the 1000 social media visitors.
- Primary revenue is $2000 on 40 e-books at $50 each.
- Add on revenue is $500 on 10 audiobooks.
- Secondary back end revenue is $400 on two “coaching” sign ups.
Let’s run the numbers:
- Revenue: $2000 + $500 + $400 = $2900 (previously $1000)
- Expenses: $750 (same)
- Profit: $2150 (previously $250)
- VPC: $1.45 (versus your previous $0.25)
- Close to Six Times the previous VPC and nearly Nine Times the previous profit.
“Sure, but it’s still only $2000 or so a month,” you say. Here is where knowing your value-per-click becomes your key to wealth. Without it, you would, in this example, not have known that:
- Driving down CPC can have a dramatic impact on profits
- Add-ons/Up-sells could almost double you revenue, with little up front cost (recording an audiobook on your computer, for example)
Yes. You can now become rich. Prior to this, your “example” site’s 25% profit margin looked good on paper. But its small value-per-click of $0.25, and small revenue of $250, lacked a very essential thing: scalability. There was not another $750 a month being generated to plow back into the business and help it grow, even if you wanted to.
At $2,150 a month, you can put that additional $750 in, or more, buy another Facebook (or other) ad, and begin the process of ramping up the business. You can now double your advertising, while still retaining more dollars in profits than in previous months. And then double this again next month. And the next. Scalability is now affordable, while still keeping profitability and cash flow on a positive climb. Congratulations, your increased Value per Click, and your awareness of it, has allowed you the margins to succeed where most online start-ups fail.
Remember: revenue-per-click, cost-per-click, value-per-click. Know them at every stage of your business, and use them to make the critical decisions at the start-up phase and at any time in the life of your online business.