by VikR
13 replies
I have a question about how to calculate ROI.

I was reading an excellent article by Noah Kagan about Facebook advertising.

He says it will cost approximately $0.75 per click, and that the conversion rate from click to paying customer is often about 1% - 2%.

If the conversion rate to paying customer is, say, 1%, that means you need to pay for 100 clicks to get one customer.

If clicks cost 75 cents each, that means you have to pay $75 per customer.

So my question is, how can you have an ROI if your profit per unit is less than $75? It seems like it will cost $75 per conversion.

Thanks very much in advance for any thoughts/advice/info!
#question #roi
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  • Profile picture of the author Ged3
    Hi VikR,


    you are right with the analysis above - it would cost $75 for a sale at 1% conversion.


    There are two point here.


    The first is that if you can use a way to capture that customer's email address (an auto responder sign up) then he/she may well purchase a lot more = life time value of your customer.


    So say the customer then purchases $300 in total as a customer and $250 of that is profit you would make $175 profit from him.


    So the life time value of a customer is what marketers look at, not just the first sale.


    The second is that you would want to try and look at a higher conversion ratio that 1%.


    4% is the market average.


    But whatever you are selling you need to see what your conversion rates are and adjust them to yourself and check to make sure you are making a profit.


    On Facebook you can start from about $5 per day.


    So always start with the smallest amount and check your stats and conversions every day and then at the end of each campaign.


    Hope this helps.


    Ged
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    • Profile picture of the author VikR
      Thanks very much for this info. Is 75 cents the market average cost per click?
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    • Profile picture of the author IGotMine
      Originally Posted by Ged3 View Post



      The second is that you would want to try and look at a higher conversion ratio that 1%.


      4% is the market average.
      Which market, exactly?

      This is nonsense, there is no "average" conversion rate. And there is no "average" CPC.

      Total nonsense.
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    • Profile picture of the author Steve B
      Originally Posted by Ged3 View Post

      ... you would want to try and look at a higher conversion ratio that 1%. 4% is the market average.



      Ged,


      You're perpetuating one of those urban legend marketing myths that has absolutely no basis in fact or usefulness. And while 4% might be your conversion ratio on one particular campaign, it has no relevance for the OP and his/her unique situation. Please provide the credible source for this number and don't say guru Guido told you it was so.


      Steve
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  • Profile picture of the author Ged3
    Hi VikR,


    I am not sure what the average cost per click is.


    I think I got about 39 clicks for $5 on my last campaign, so that works out at about 20c per click.


    My profit was $7 per sale.


    So if you are making a good profit from whatever you are promoting then it could be worth it.


    For example if you paid $75 and made $100 per sale then you will make $25 profit.


    Creating a Facebook group can help that is connected to your niche - you can get free traffic to this.


    Hope this helps.


    Ged
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  • Originally Posted by VikR View Post

    So my question is, how can you have an ROI if your profit per unit is less than $75? It seems like it will cost $75 per conversion.
    VikR great questions. Sounds like some newbie questions. The answer lies within backend marketing. If your business revolves around paid advertising, then the bulk of your profits will come from backend marketing. The average lifetime value of a customer is a good indication of how much you can afford to lose on the frontend (acquiring a customer), before you lose money on a campaign.

    So to make up a decifit from acquiring a new customer, you either have to have an extremely high backend conversion funnel rate.... or simply offer high ticket items to your customers so that you can dramatically make back the money that you've invested in acquiring the customer in the first place.
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  • Profile picture of the author VikR
    Thanks very much for this info. Currently I'm very cautiously estimating the LTV of a new customer at $15. Are there products successfully advertising on Facebook with comparable or lower LTVs?
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    • Profile picture of the author Ged3
      Yes you can make more than $15 per customer - but that will be from them joining your mailing list and purchasing lots of different products from you over months or even years!


      Hope this helps


      Ged
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      • Profile picture of the author VikR
        Sorry, I didn't express my question clearly. If a business *only* makes $15 per customer, can it still get an ROI from Facebook ads?

        I would think there are probably a lot of companies selling products on Facebook with a profit of $15 per sale, but I might be wrong.

        For example, with a 4% rate of conversion from clicks to sales, a business like this would need to get 25 clicks for every sale. To get the cost-per-sale down to around $5, the cost-per-click would have to be about 20 cents.

        Is it usual to find companies doing business like this on Facebook, or would it be unusual?
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  • Profile picture of the author VikR
    It's an honor to have this thread on the feed!

    For new thread visitors, here is a quick summary.

    Given cost-per-click and conversion rates for different businesses, how often do we see a company that has an average lifetime value per customer of $15 or less, with a successful ad campaign on Facebook?

    I would think there would be plenty of companies like that, but I might be wrong.

    Thanks very much in advance to all for any thoughts/info!
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  • Profile picture of the author nkjackson
    Adhering to the numbers in your example, you would need a profit of $75 per sale to break even on your advertising. Your math is correct for that example. However those number may not apply to your business. There is no universal average cost per click or conversion rate. Your numbers will depend on your product, your images or videos, your offer, the people you are targeting, whether they know your business or not at the time of exposure to your ad, and whether they have purchased from you in the past, among many other factors.
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  • Profile picture of the author VikR
    Thanks for the info, @nkjackson.

    Are you aware of any campaigns on Facebook that appear to have a profit-per-purchase of about $15 or less? The only one I know of so far is OvernightPrints.com, 500 cards for $19.85.

    The reason I ask is that that would be a profit-per-purchase comparable to a potential business startup I am looking into.
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  • Profile picture of the author VikR
    Since this question is different than the one referenced in the title of this thread, I will put it in a new thread.
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