So how profitable is your online advertising spend? Finding answers to this question is not as hard as many business owners may think. In this short note I’ll take you through a fictitious dialog with a prospect to show you the steps we follow to reveal if their existing online marketing is forging a path towards future business profitability or short term loss.

I remember the first time I was introduced to this concept of “creating a path to profitability”. I was employed by a dot com company that was full of promise, investor’s funds and unbridled enthusiasm. We had lavish offices, fancy art on the walls and only the best advertising agencies to work with.

Just to give you a guide on how much money was involved back then. We were part of a larger company that between us shared two floors of a recently built office block overlooking Auckland harbour. So it was decided that rather than use the stairs to move between us we would arrange for a building firm to cut a massive hole in the middle of the top floor and build a marble staircase to link the two. I was OK with using the lift.

Anyway, the company was fortunate enough to hit the market at the right time with the right type of product. Low and behold after three months of trading the financial results were in and we had made a profit. Yippee! I was asked to come into the CEO’s office immediately when the figures were released and was told to sit down as he shut the door behind me.

Yes the result was good. I had apparently shown them a “path to profitability”. Now my job was to widen the trail, hire more staff and open more offices to grab as much of the market as we could. We never achieved the same profit figures again. Fortunately this company had deep wallets and a plan to keep moving while the funds were leaking out of the company.

Anyway, back to applying this to online marketing. Frequently people start a conversation with us when they think they are in situations like this, spending too much to achieve very little.

Within a few minutes of us talking we can generally see where the focus needs to be applied and have outlined a very simple path to profitability to follow. Here’s how the conversation usually goes. To make this work I’ve included a fictitious business owner Mike who runs a service business in Auckland. Mike is struggling to make his online marketing pay its way. He spends around $750 per month with Google AdWords and is not sure if this is too much or too little. He is convinced it’s the former.

CONVERSATION STARTS

Ring ring…. we join the conversation after Mike has told me a bit about what he does and how long things have been going.

Chris: OK, so let’s start with the ideal end result – you making sales. When this occurs, what would be its average amount?

Mike: Well it depends on what they buy. But on average I would say $450.

Chris: Now of this amount how much would you be prepared to spend on marketing?

Mike: As little as possible J

Chris: Thank you. I know that every business owner would want the same so let me put it another way, what would be the most you would pay before the cost of creating the sale exceeds the profits it would produce?

Mike: OK, so I know I was a bit glib with the first answer so let’s go with $50. If it costs me $50 for each sale then things still work. I can pay for all my materials, pay the staff a wage and have a bit left over for a rainy day.

Chris: Great, now just so I’m sure – how many of your clients would you expect to buy from you more than once?

Mike: While our industry should have repeat business I must admit that we are not that good at generating it. However, if we were I would expect 20% of clients to repeat within two years BUT I didn’t allow for it when coming up with my very rough $50. I expect my current leads to be paid for by the money we create from their first sale, not those they may produce in the future.

Chris: OK so working back from the sale being made. How many prospects do you need to talk to before you make a sale?

Mike: Again this all depends on the type of work people are looking for. The quality of our leads really fluctuates – especially from the website. But to break it down into averages I would pick that half of those we talk to will become a client.

Chris: So for every two prospect leads you create – one will become a client.

Mike: Yep that’s true, but quite often we cannot get hold of the leads that are generated through the website. I would say that allowing for this we would need five leads to create one sale.

Chris: OK so the $50 needs to be split between these five, leaving $10 as the most you should pay for a lead. Anything more than this and your marketing costs are looking too high. At the start you mentioned spending $750 per month with Google – which should represent about 75 leads at the average cost of $10. How many leads are you getting?

Mike: Not that many. Probably on a good month we would get around 30. I’m not exactly sure – I’ll have to go back and check my email to count them up but it’s nowhere near 75. Sounds like I might have to put a stop to all that Google advertising… I thought it was costing too much!

Chris: Hold on… Before you jump ahead, instead of checking your email can your website analytics tool provide that lead count?

Mike: What analytics? We don’t have any for the site. I do get a raft of reports from the people who manage my Google advertising. Clicks, and impressions – is that what you are referring too?

Chris: Nope. What about visitor counts and page views? The details giving you insights on how your website is performing with the traffic it is currently receiving?

Mike: Sorry – I don’t have anything like that.

Chris: OK. So let’s not jump into cancelling anything with Google just yet. First off let’s set up some analytics on your site and let it run for a couple of weeks to collect some data. Then we should see which keywords you are buying clicks for that are actually delivering the right types of people to your site who then go on to fill in your quote request form. There could be some that do this for $5 and likewise others that do it for $100 and of course some which arrive and don’t convert at all.

Mike: So I presume we would dump those that don’t convert or convert at too high an amount and focus our spend on those that fit below our target $10 per conversion rate?

Chris: You are on the right track but not exactly there. Yes to focusing on the low cost conversions but no to automatically dumping those that don’t convert at all or do for too high an amount. For instance we may find keyword phrases that are responsible for traffic which doesn’t currently convert but between us we feel should. It may not be a problem with the wrong sort of visitor – it may be that the site is not set up to convert them yet. The same goes for those costly converting keywords. Let’s not dump these as again we could have a content issue. And not wanting to layer too much complexity on it too soon, but there could be leads that cost a lot to convert but represent the best types of customers for you.

Mike: You had me all the way through until that last part. Let’s get some tracking going and then we can dig into what spend is creating what.

Chris: I know there’s a bit of complexity in here but just remember that the path to profitable online advertising starts with your ideal cost per lead and works backwards. We know this so with some analytics running between us we can find out the rest.

CONVERSATION END

Yes, I know it’s a very simplistic view and the numbers were made to be nice and neat. However this short dialog should provide some insight on the steps ahead. Give us a call today if you would like to move forward like Mike did.