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Calculating Conversion Cost for Google Ads

With the start of the new year, it’s a good time to review marketing objective and targets, with one of the main key performance indicators (KPIs) in Google Ads being cost per conversion. Whether you’re selling something, generating leads, driving foot traffic or building readership, you need to have a target cost per conversion to measure the success of your campaigns.

Like any marketing activity, Google Ads needs to have some measure of a conversion, or completion of an objective that you want to achieve once you spend money on advertising your business. Usually these conversions can be imported from Google Analytics (goals) or you can use some Google Ads tracking code on your site to indicate when a desired conversion takes place. These conversion metrics will also include a conversion rate (what proportion of conversions come from your site visits), and most important, conversion cost (the total spend divided by the conversions).

You may just want to track one specific conversion, or have multiple actions that need to be recorded, but there should be an overall target of what would be an acceptable conversion cost that makes your campaigns cost effective or not. This can be hard to calculate at times, but ultimately every advertiser using Google Ads should set an acceptable figure to use as a target to manage the ad campaigns and to make adjustments around the required conversion cost.

Every business will be different and will set different conversion cost metrics, which can lead to ROAS (return on ad spend) or the more general ROI (return on investment) calculations to indicate how successful a Google Ads campaign might be. It can also be dependent on the quality of internal tracking systems, but most conversion calculations will probably be based around one or more of the following:

* cost per sale: for ecommerce retailers, the target cost per conversion should be easiest to set, particularly if ecommerce data on transactions and sales values can be tracked and imported from Google Analytics. As a rough guide, the cost per sale should be possible to set, based on average order values from the past 3, 6 or 12 months and using average margins and required ad spend for every sale. For example, if the average sales value is $100 with a 40% profit margin, then the cost per sale needs to be at least below $40 and ideally at the % level set for marketing spend (so 25% marketing costs would bring the cost per conversion down to $10).

* cost per enquiry: this is probably the most common conversion action for most advertisers and can be harder to set, although a rough guide would be based on the number of sales generated from enquiries, and the average value of each sale. So for example, if the average value per customer is $100 and 1 sale is generated from every 5 enquiries, the cost per conversion would be $20. An advertiser may have multiple types of enquiry with some more valuable than others, but an average figure would be necessary in these cases.

* cost per visit or pageview: this may be harder to measure and is more applicable for news sites, bloggers or other sites that make an income from selling ad space. Again, the cost per thousand advertising charges or income received would be used as a basis to calculate the value of a visitor and the pages viewed, or for example, any visitor that viewed 5 pages or more in a visit.

* cost per impression: if an advertiser is focused more on display ads and brand awareness, this can also be harder to measure but a target cost per thousand impressions might be calculated on the value of a ad view and potential recognition of a brand, which can then be compared to other potential traffic sources or advertising campaigns.

With all the above figures, there will be multiple factors that can have an impact, but an average over a previous period should be used as a guide, even to calculate a ‘back of the envelope’ figure that the business would be comfortable with. There can also be considerations like cross-selling or lifetime customer value to take into account. However, the calculated conversion cost then becomes a starting point and a key metrics that should be improved as the Google Ads campaign is managed and developed as data is collected in the account.

If you’d like to know more about conversion cost calculations for your business, please get in touch.