High Margin Percentage With High Cost Per Click? Huh?

margin percentage

A Small Margin Percentage Debate

Mark (Marketing Manager): “Hey boss, I got a great average margin percentage for our online pens store site – 30%!”

John: (CEO): “Cool, Mark. And how much do you pay per click?”

Mark:: “Oh. I pay on AdWords about $5…”

John: $5? It’s too high. I wouldn’t pay more than $0.5, You gotta lower that bid,. You could have got 70% for the unit margin. Your numbers don’t make sense”.

Mark: “But I can improve it for this CPC”

John: “I don’t think so. In my experience, as time goes by, your costs will go higher, leaving you with a lower unit margin & a jeopardy for campaign’s success.”

Mark: “But John. You gotta listen a minute”.

John: “I am sorry Mark. I have a meeting within 5 minutes. I don’t want to deal with this issue anymore. High CPCs are a menace. Just do what I asked you.”

Mark: “???”

This kind of a conversation can happen on a daily basis in agencies and firms with online marketing division around the world. On the one hand the CEO may be right – indeed low CPCs make It more simple to have low cost per action (whether it’s a lead or a sale), but on the other hand professionals like Mark may have some tricks they can pull and win the cost per action game. Do you think John is right? Or is it Mark. Let’s have a closer look at this issue.

What Effects Your Margin Percentage From Online Marketing Standpoint

Your margin percentage is basically a calculation of the unit margin divided by selling price unit. Since the monetary unit margin formula is the unit margin = selling price cost – the cost per unit you can take this formula and substitute it with the formula for margin percentage. This means that:

Margin\quad (\%)\quad =\\ \\ \frac { Selling\quad Price\quad Per\quad Unit\quad -\quad Cost\quad Per\quad Unit }{ Selling\quad Price\quad Per\quad Unit } \quad =\quad \\ \\ 1-\frac { Cost\quad Per\quad Unit }{ Selling\quad Price\quad Per\quad Unit }

 

This formula means, that as long as you’ll keep the cost per unit as low as possible, while selling it for the highest selling price possible, then the margin percentage will be near its optimum level. Having said that, let’s see what happens in when you market your product online using cost per click advertising.

 

Let’s Be Simplistic About The Cost, With But Not Too Much….

In the ppc advertising world the cost per unit is the cost per sale for that unit. But since the cost per sale is comprised in most cases with sum of the costs of the clicks that were relevant to the generation of the sale you’ll have to dive further with the formula & see how to show the same margin percentage using cost per click on the right side of the equation.

Margin\quad (\%)\quad =\quad 1-\frac { Cost\quad Per\quad Acquision\quad Per\quad Unit }{ Selling\quad Price\quad Per\quad Unit } \quad =\quad 1-\frac { Clicks\quad Cost\quad Per\quad Unit }{ Selling\quad Price\quad Per\quad Unit }

Now it’s time you’ll have a clear expression of the clicks using average CPC. Thus, you’ll need two more steps (tedious, ha?) till you’ll get the result you need.

Here’s the formula of the CPC:
Average CPC\quad =\quad \frac { Clicks\quad Cost\quad Per\quad Unit }{ Number\quad Of\quad Clicks\quad Per\quad Unit }

This means that the Clicks Cost Per Unit is:
Clicks\quad Cost\quad Per\quad Unit\quad =\quad Number\quad Of\quad Clicks\quad Per\quad Unit\quad *\quad Average CPC

And after you got all of this done, post the last formula into the margin percentage formula and you’ll get it for the ppc adverting world:

Margin\quad (\%)\quad =\quad 1-\frac { Number\quad Of\quad Clicks\quad Per\quad Unit\quad *\quad Average CPC }{ Selling\quad Price\quad Per\quad Unit }

 

Now Back To Our Little Debate

From what you can see here the margin percentage is effected by the number of clicks per unit, the average CPC and the selling price per unit. Since the selling price per unit is the exact one we have in the original margin formula we can conclude that the multiplication result of the average CPC by the number of clicks that led to a sale of a unit should be far less than the selling price per unit.

By having this behavior of these variables you can have a high margin since the subtraction of the fraction I mentioned above from the value of 1 will be high, thus producing a high margin.

And let’s go back to our little debate: The CEO is only half right, since a low average CPC will indeed contribute to a high margin. But this is not enough: there should also be a low amount of clicks so that the whole multiplication of these numbers will yield a low cost vs the unit sale price. In other words, the unit’s sales conversion rate should still be high enough in order to cover the click expenses fast enough.

Therefore, profitability will still be possible as long as there are low amount of clicks, and a relatively high average CPC, or a relatively high amount of clicks and a low average CPC.

So once again in online marketing it occurs that price isn’t everything. A good VP marketing should guide his marketing managers to constantly come up with idea about how to get more conversions for less clicks, and as a bi-product not just to be technocrats, but to also be creative with the ways they are generating leads and sales.

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