Funnel Math for PPC 101

Whenever I speak with a new PPC client, I ask a sequence of questions to understand their lead funnel and more about their business. They’re usually something like this:

  • What is a customer worth to you? (Lifetime Value or LTV)
    • What is the average order value? (AOV)
    • How many orders will a customer make in 12 months?
    • How many years do your customers stick with you?
  • How many leads/prospects do you talk to on average to get one sale? (conversion rate)
  • What is your average cost per click? (CPC)

Not every advertiser knows the answers off the top of their head, so I usually email these questions ahead of time. Even then I often don’t get clear answers on all of these questions. However, these numbers are what allow you to calculate the true value of your PPC efforts. Here is a breakdown on how the math works.

Funnel Math

LTV / (CPC x (1/conversion rate)) = Return

Let’s give the above calculation a scenario. Say you’re an ecommerce store selling the new Lonzo Ball basketball shoe (retail price for the ZO2 is $495). You can get clicks from AdWords shopping ads for $0.37 and clicks from Facebook for $0.23. AdWords traffic converts at 1% and Facebook traffic converts at 0.8%. Since this is the first shoe and the long-term prospects of Lonzo are unknown, we’ll assign an LTV that is equal to AOV. Since some people will buy larger sizes (more expensive) or get an autographed pair (more expensive), we’ll say the average AOV is $550. Then here is what our return is for both channels:

  • AdWords Return = $550 / ($0.37 x (1/1%)) = 14.86
  • Facebook Return = $550 / ($0.23 x (1/0.8%)) = 19.13

This shows us that Facebook is more efficient than AdWords, though both channels may be successful.

What To Do Next

Once you know the return on your advertising dollars, you can now begin making changes to optimize or improve the return. Here are some ideas to think about:

  • Improve your conversion rate – This should be your first focus because this is the first calculation we make and it’s effects will be multiplied.
  • Increase your AOV – Getting existing customers to purchase more is easier and less expensive than acquiring new customers.
  • Remind customers to repurchase – If a customer reflexively comes to you for repurchase there is no more price shopping and competitive research, they just buy. Make sure you stay on their radar so this happens instead of a new purchase process.
  • Lower your CPCs – I’ve put this at the bottom of the list on purpose. The other factors above are more core to the business than finding cheaper clicks, so this should be one of the last places you go.

What steps do you take to optimize and improve return? We’d love to hear your questions and comments below!