Know Your Numbers – The Achilles Heel of Small Business Advertising

Do you know your Achilles Heel?

I spend a lot of my time talking to small- and medium-sized businesses about online advertising. One of the first questions I ask them is “what can you afford to spend to get a sale?” The majority of time I get a blank stare or a half hearted “we kind of know.” If you don’t know the answer to this question, stop everything you are doing and figure it out now. The old adage in business applies here – if you don’t know your numbers, you’re losing money.

In general, there are two basic ways people end up making money with their websites: they sell something or they get a lead who  eventually they can sell something to. The process of figuring out how much you can afford to spend on each one of these is basically the same, the latter only having one more step in the process. Here’s how you do it.

The first thing you need to do is figure out what your average cost of sale is. Let’s use a simple example where you only sell one product online and it costs $75. How much of that $75 can you afford to spend on sales and marketing? This number is different for every business, but let’s say in our example you can afford to spend $25 dollars to get each sale (leaving you $50 in profit before other costs like salaries and things). This is your target CPA (cost per acquisition), and it’s what you’ll need to manage your online advertising spend.

Now let’s look at the example of a lead and how to figure out the right price you can afford for this. Let’s say you have a website that sells a pool-cleaning service. An average client will spend $1000/yr if they sign up for your service. Let’s say it costs you $500 in salaries and chemicals and all that to perform this service. You’re left with $500 of profit. Is your CPA $500? Nope. You have to figure out how many leads it takes to get a real client. Let’s say 10% of your leads actually turn into a paying client. In that case your target CPA is $50. If you spend more than $50 you’re going to eat into your profits (or even lose money). So the calculation for a lead is similar to the calculation for an online sale with the exception that not every lead turns into a sale.

I’ll say right now that there is no “right” price for a CPA. Every business is different. We see CPAs from $1.50 to $300. It depends completely on the product or service that is being sold, and how much profit there is built into the price of that product or service.

Once you have these numbers, go back to any online advertising campaigns you are running and do a gut check on what you’re spending. Many times businesses are shocked to find out they have been spending $300 to get a sale when they can only accept $50. Don’t fret, this just means that you need to optimize your campaigns. Take out those expensive keywords you’re bidding on that are not turning into sales fast enough. Drop the prices on keywords that do convert to sales but are slightly over the cost you can afford. And make sure you’re spending your money in the right places (for some Trada customers Yahoo is actually much cheaper to acquire a customer on than Google).

A little calculating up front and a bit of work afterward can quickly get you back to using online advertising in a profitable way!