Using Google Ads for Leads?
What should you be spending to be profitable? Are you guessing?
Stop! Make sure your Google Ads campaign is profitable for leads.
Using Google Ads to drive traffic to an e-commerce store is fairly simple to determine the CPA (Cost Per Acquisition/Sale). Just make sure you’re making a profit and the CPA isn’t higher than the profit for each product sold.
If you plan on using Google Ads to drive traffic for leads calculating the target CPA can be a little more confusing and complex.
We’ll take a look at what you should be spending and not spending with Google Ads to be profitable for leads.
What is CPA and Why it’s Important
Let’s first take a quick look at CPA and what it’s all about.
CPA or Cost Per Acquisition is the cost of a conversion, or in other words, the cost for each lead or sale.
Knowing your CPA is vitally important to make sure you are not spending more than you are making. After all, the purpose of driving traffic for leads and sales is to make a profit.
If you don’t know the target CPA you may be spending more money on clicks than you are making with the sale.
Figuring out your CPA for Leads
When generating leads with PPC, there are two conversions to consider. The first is the action the visitor takes on your site to become a lead, like subscribing to an opt-in, newsletter or completing a lead form. The second conversion is when that visitor turns from a lead to a sale.
Not every lead will convert into a sale. So, you’ll need to look at as large a sample of data as possible. The larger the sample size the more accurate the calculations.
Let’s take a look at how we determine what the CPA should be for generating leads for sales.
To determine the CPA, you’ll need to know a few numbers. These numbers are important to being profitable with PPC (pay-per-click) advertising. You may need to check with your sales team and/or accounting.
Sales Conversion Rate
The rate leads are converted into sales. This is the number of sales divided by the number of leads. Typically represented as a percentage.
Sales Conversion Rate = (# sales ÷ # leads)
If it takes 10 leads to make 1 sale, you have a sales conversion rate of 10%. The larger the sample size the more accurate.
Sale Revenue
The gross amount of a single sale, not including Cost of Goods or Marketing/PPC.
Cost of Goods
The amount it costs you to manufacture, store, package, or any other costs involved in producing the product.
Breakeven CPA for Leads
First, you’ll need to know the “breakeven” CPA, the amount at which you make no money.
Why would you want to know that?
It’s important to make sure you are not spending any more on PPC than the revenue from the sale. If you are, then stop or you’ll go out of business. Pause or reduce the spend on those campaigns immediately, until you can optimize the CPA (or anything else to make it profitable).
Breakeven CPA = (revenue of sale – cost of goods) x Sales Conv Rate
For example:
If each sale is $2000 and the cost of goods is $1000 the profit is the difference, $1000.
If you make 1 sale for every 10 leads, the sales conversion rate is 10%. This means the “breakeven” CPA is $100.
See, you would need 10 leads at $100 = total of $1000 to get one sale. The profit of that sale will be completely spent in getting the leads, so you make no money. This is the “breakeven” CPA, not a positive ROI.
Target CPA for Leads
The target CPA will be less than “breakeven” CPA. This is the CPA you are willing and able to pay for each lead with a built-in desired profit. This will be different for each business, based on the desired profit margin and sales volume.
Target CPA = (revenue of sale – cost of goods – desired profit ) x Sales Conv Rate
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Using the original example, we still need 10 leads, and our example sales conversion rate of 10% to get a sale.
Gross revenue of the sale is still $2000 and the cost of goods sold is $1000. If we factor the desired profit of $500, this gives us a Target CPA of $50. Now, a $2000 sale gives us a $500 profit.
One sale is not enough, but with a 1000 leads (still at 10% sales conversion and Target CPA of $50) that’s $50,000 profit.
Yes, you had to spend $50,000 to get $50,000 profit, but the more you spend the more you make, as long as your sales conversion rate and CPA are kept in check.
Optimizing the sales conversion rate or lowering the CPA will garner more profit. If the CPA is at or above the Breakeven CPA, optimizing the campaigns, or hiring an Agency to do this will improve the health of Google Ad account the profitability of the business.
Once you know the Target CPA, Google Ads has a Target CPA bidding strategy to help you meet this goal.
Conclusion
As you can see, if you are spending money on Google Ads (or any other PPC) for leads it’s easy to be profitable, but you need to know your Sales Conversion Rate and Cost of Goods. Without knowing your Sales Conversion Rate, there is no way to set an appropriate CPA goal or make marketing decisions.
If you are working with a Google Ads management agency, the target CPA for leads is something that will come up and they should be asking you. Target CPA is how a manager is going to determine your profitability and optimize the campaigns.
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