I talk a lot about content because it's how I drive traffic to my site. And while it can be a highly effective medium for driving traffic for certain industries it isn't universal. There are plenty industries where it makes a lot more sense to drive traffic through more traditional means like paying for traffic.
Why Use Ads
So let's talk about ads. The amazing thing about them is:
- That they can be a money machine
- They're incredibly fast
There's a reason that companies spend millions on advertising and that's because it works. They can see a return on their investment. In the right industry under the right conditions you can spend $1 in advertising and get $2 back. When you have a highly profitable product or a product that keeps customer coming back every month it's usually worth spending a few dollars to get them to your website.
The other great thing about ads is they don't take any time to setup. All of the passive channels like content marketing and SEO are long games and take months before you see progress. With ads you could launch a site today and have thousands of visits the very next day. Awesome right?
But of course ads aren't right for everyone. Sometimes the math just doesn't add up. Before you start shelling out for ads let's do some simple calculations.
Get Your Profit per Order
The first thing you need to estimate is your profit per order (PPO). This can be nearly impossible to predict and the number will change overtime as you get more data and optimize your site.
In my case because I only sell one product and there are a very limited number of formats I generally make $5 an order (profit not revenue).
Once you have your PPO you now know the absolute maximum you can spend to acquire a new customer. If you spend $5 to make $5 you're coming out even. Now this is assuming that 100% of people that click on an ad actually buy something. That's nowhere near reality so let's compensate for that.
Get Your Conversion Rate
Conversion rates vary from industry to industry and from site to site so if you don't know have your own data a good conversion rate is 1-2%. If this is your first e-commerce store use 1%.
Calculate Your Acquisition Cost
Now you need to figure out how much it's going to cost to run ads. You can create a free Google Adwords account and see how much certain terms cost.
And on Facebook:
Once you have the cost of an ad you need to divide it by your conversion rate to figure out how much it costs per order. If I'm acquiring customers from Google Adwords that's $1.22 per click and with a 1% conversion rate thats $122 per order.
Facebook is cheaper in this case with $0.36 per click. That would cost $36 worth of ads to get an order.
Ads or No Ads?
This is the easy part. If your cost of acquisition is lower than your profit per order then you should do ads.
In my case my COA is $122 and my profit per order is $5. It's a no brainer that I don't want to spend $122 to make $5!
When Should You Use Ads
Content marketing and SEO are great but they can take 3-6 months to show any significant increase in traffic and that's for the experts. Ads can get you a lot of traffic quick.
If you're targeting cheap keywords and your profit per order is higher than mine ads could be a very viable option for you.
I used profit per order for this back of the napkin calculation. We really should be using customer lifetime value (CLV) to represent repeat purchases. Although if I did that the blog post would be 10X longer. If you're one of those people that love spending hours and hours manipulating data in a spreadsheet there's a comprehensive guide on how to calculate CLV on KissMetrics.