I feel like there’s a growing misconception among people connected to the digital advertising that anytime you can get more conversions, you definitely want that. Of course, the first response from someone whose personal financial health depends on a business earning profit should be “that sounds good”. If everyone was perfectly honest and their goals were aligned with each other, this wouldn’t be a problem. In this post we’ll discuss a few key concepts that an advertising decision maker of any kind needs to understand in order to consistently make profitable decisions.
- What’s a conversion?
In my opinion, the best definition of a conversion is an action that can be reasonably connected to an amount of revenue generated. An ecommerce transaction is a perfect example of a conversion. The tools we have today make it quite easy to track sales to digital marketing touches, especially in a one touch transaction. A non-ecommerce advertiser will usually track sales leads. Many of these advertisers find that an online form fill is more or less valuable than a call to a live operator, but we can still reasonably apply an average value if we do a reasonable job of customer tracking in a customer relationship management platform.
Some people (usually agencies, search engines, social media sites, local TV reps struggling to stay alive despite reaching an audience of about 37 80 year olds, those types, but also some well meaning misinformed consultant types) will name something that cannot be 1:1 connected to generating revenue as a conversion. This comes in many forms. Likes, shares, retweets, impressions, views and clicks are all classic soft metrics. These have been sold, exclusively to the benefit of the seller, to unsuspecting business owners and marketing managers for years. In other cases I’ve seen time on site greater than 15 seconds or greater than 1 minute tracked as conversions.
The important part here is that, if you want to track something which will help you drive revenue, it’ll need to be a conversion that either directly deposits money into the merchant account, or be able to prove beyond a reasonable doubt that it is connected to future revenue. Anyone who bought facebook likes in the 2010-2012 days and then watched with horror as organic business page posts went from seen often, to less, to less, to almost never has a good understanding of the value of a conversion that doesn’t directly result in a sale. So now we agree, resolved, I only care about conversions that generate revenue.
2. OK, so now we care about the right conversions, why shouldn’t we maximize them?
Great question. The answer is that under normal market conditions, there is a tradeoff between number of transactions you can generate and the cost of each transaction. The reason for this is that at a lower number of transactions per time period, you can pick low hanging fruit. Beyond zero cost per acquisition sales like selling to friends and family, if you set a tight cost per incremental conversion constraint, you can make decisions like buying ads only when the customer shows higher buying intent or has a history of buying your product. The fruit is even lower hanging if they have a history of buying your product from you.
It won’t be possible to mass market using any medium at as low a cost per conversion as you can get from lower funnel marketing like high intent paid search, email, texting, direct mail and personal customer follow up. That said, mass marketing has the potential to scale revenue more quickly. When Google talks about maximizing conversions, they almost always fail to account for incremental cost. If I’m selling a product, and I know my customer lifetime value is $70 net (after overhead and non advertising expense) Should I be happy with the following scenario?
Before Google “helps” me by expanding exact match or talking me into switching to maximize clicks bidding I’m getting 100 conversions per month at $50 cost per conversion. After Google’s wonderful help, now I’m getting more conversions, say 110 and my cost per conversion is $60. Let’s calculate the net profit in both scenarios.
Scenario 1:
100 conversions, $70 customer lifetime value, $7,000 gross.
100 conversions, $50 CPA, $5,000 cost.
Total, $2,000 net profit.
Scenario 2:
110 conversions, $70 customer lifetime value, $7,700 gross.
110 conversions, $60 CPA, $6,600 cost.
Total, $1,100 net profit.
So, as we can see, the 10% increase in conversions actually reduced net profit by 45% because of the increased acquisition cost of those conversions. Keeping this in mind when choosing between maximizing conversions or minimizing cost per acquisition will help keep the focus on business results, instead of marketing jargon.
