When you have found the online marketing strategies for your small business, the next thing is to estimate the profitability of your marketing campaigns. A goal for your marketing profitability for your online business should be that it at least “pays for itself” and hopefully also contribute to your profit margin.
Improve your marketing profitability with 3 key figures.
You can use tree key figures to make a qualified guess on how much you will earn on a given marketing announcement. The key figures you need are the conversion rate of your site, the average order value and the average profit margin on your products. The estimation of the marketing profitability will be no more than a guess, but it will never the less help you to determine if you should go ahead and use the given marketing solution.
First of all you need to calculate your conversion rate and average order. Here is a quick intro on how you can calculate the conversion rate.
How to calculate your conversion rate.
The conversion rate is a key figure that tells you: within a 100 customers, how many of these customers are buying something. As you want to use the conversion rate to estimate the profitability of your marketing, I would recommend using unique visitors in the calculation. The way you calculate the conversion rate is:
Number of orders / Number of unique visitors x 100
30 orders / 1.000 unique visitors x 100 = conversion rate 3%
What if I don’t know my conversion rate?
If you don’t know the conversion rate of your e-commerces site, you can use the average conversion rate for eCommerce’s sites as a whole, or for eCommerce’s in your niche, if you can find this figure. For eCommerces as a hole, the conversion rate is around 2.2 percentages (according to shop.org). This figure is an average for all Internet businesses and will of course differ dependent on what business you are in. If you run a new eCommerce websites, you probably has a conversion rate that is lower than 2,2%.
What if I don’t have any average order value?
If you have a new website with no sales, you can make a conservative guess on what an average order value could be for your site.
If the goal of your website is not to sell anything, you should still use average order value as a measure. The way you could do this is to figure out what a give activity are worth to your. An activity could be signing up for a newsletter, clicking on a banner ad etc.
Estimation of your marketing profitability.
Case: You consider advertising on a portal with 1.000 unique visitors a day (30.000 a month). The price of a banner ad is 100$ per month. The ad will be placed in a category with 7 subcategories.
Now the question is: Is a 100$ a fair price?
- Let’s say that the head category where your ad is populated is very popular. 30% of all visitors to the portal clicks on it (that’s 30% of 30.000 = 9.000 visitors a month).
- Your ad is placed in one of 7 sub categories and 30% of the portal visitors clicks on “your” subcategory (30% of 9.000 = 2.700 visitors).
- Your ad is placed as number 4 out of 10 ads. The other ads sell the same products as you. You have a good text and a nice picture on your ad. Therefore, 30% of the visitors click on your ad (30% of 2.700 = 810 visitors).
- Let’s say you have a conversion rate on 2%, an average order value on 100$ and that your average profit margin is 30%. This will give you an estimated revenue on:
810 visitors x 2% conversion rate = 16 orders.
16 orders x 100$ average order value = 1.600$ gross sales.
1.600$ gross sales x 30% profit margin = 480$ revenue.
Conclusion: It is worth trying to advertise on the portal!
- Let’s say that the head category of your ad has 10% of all visitors on the portal (that’s 10% of 30.000 = 3.000 visitors a month).
- Your ad is placed in one of 7 sub categories and 20% clicks on “your” subcategory (20% of 3.000 = 600 visitors).
- Your ad is placed as number 10 out of 10 ads. The 10 other ads all sell the same products as you. Therefore, 10% of the visitors click on your ad (10% of 600 = 60 visitors).
- Let’s say you have a conversion rate on 1,2% (you have a new website), an average order value of 100$ and that your average profit margin is 50%. This will give you an estimated revenue on:
60 visitors x 1,2% conversion rate = 1 orders.
1 orders x 100$ average order = 100$ gross sales.
100$ gross sales x 50% profit margin = 50$ revenue.
Conclusion: It is not worth trying to advertise on the portal!
As you can see from the above calculation examples, I have made a lot of assumptions about the visitors on the portal and were the ad is placed. To make your marketing profitability estimation as good as possible, you need to find out as much as you can about the place where you are going to do your marketing. Ask how many visitors the site where your ads is placed has and how many visitors the category where your ad is show has and so on.
And another thing! If you advertise some place new, do not sing up for a longer advertising period. A month is perfect, but 3 months can also be ok. Do not sign up for more than 3 months and be sure that you can get out of the agreement relatively fast if it’s not profitable. Often the more avid and pushy the salesperson is that you are talking to, the more you have to be on the lookout. The very best is if you can get a week or 14 days for free. Then you tracking system (in a later article I will discuss Google Analytics as a tracing system of your website) can help you to see if this is a place worth spending your marketing budget on. In general, you should always track if your ads has been effective and Google Analytics is a very good tool for this.
How do you estimate your marketing profitability?
Do you have any good advice on how to estimate the profitability of a given marketing campaign? Do you make an estimate before spending money on marketing? Or do you think that it is just a waste of time as it is only being a guess? Please leave a comment and share your thoughts.