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Understanding Online Advertising Alphabet Soup

Online advertising terminology can be very confusing. You hear about a lot about different terms like Click-Through-Ratio, Bounce Rate, Cost-Per-Click, and Earnings-Per-Click, to name a few. Today we are going to look at PPC, CPC and EPC to understand how they measure the profitability of your advertising.

Pay-Per-Click (PPC)

Pay-Per-Click is when an advertiser pays everytime the ad is clicked. There are two types of PPC: flat-rate and bid-based. Flat-rate is an agreed upon fixed price that will be paid from the advertiser to the publisher for each click.

Bid based is when advertisers bid against other each other on keywords or phrases that are applicable to the target market. The bids establish a maximum monetary amount that the advertiser is willing to pay per click.

Bid-based are often found on search engines like Google Adwords, as well as popular social media platforms like Facebook and Twitter. While flat-rate is often used on comparison shopping websites. Bid-based is more common because it’s more dynamic and effective.

Cost-Per-Click (CPC)

Cost-Per-Click is your overall cost of visits from advertising divided by the total advertising spend to get those clicks. The advertising costs for these clicks usually come from a Pay-Per-Click (PPC) campaign.

CPC is calculated by dividing the advertising cost by the number of clicks produced by an advertisement.

Cost-Per-Click = Advertising Cost / Ads Clicked

CPC gives us the actual cost of our advertising across various campaigns, advertisers, and mediums. This number is very important when comparing against Earnings-Per-Click.

Earnings-Per-Click (EPC)

Earnings-Per-Click is one of the most important numbers in an ad campaign. The metric is used to average the revenue generated from each click. In other words, it is the amount of money you will receive for every click from a consumer.

EPC is often used in affiliate marketing, but the principles can apply in your PPC advertising. This number is so important because it ultimately tells you how much money you’re making through your online advertisements.

The math looks like this:

Earnings-Per-Click = Net Sales / Total Clicks

When creating the budget and goals for your ad campaign, don’t focus as much on how much you’re paying per click, but how much you’re earning per click. At the end of the day, it’s the number that matters most.

Using CPC and EPC to Maximize Your Advertising Dollars

Comparing EPC against CPC gives us immediate insight into where to put our advertising spend. If we know how much each click costs us and we know how much we make off each visitor, we can determine the optimal allocation of our advertising dollars.

Example 1:

We are running a Google search ads campaign. The advertising is costing us $7,000 per month to run and we have been receiving 1,400 visitors from the campaign. We calcuate our CPC to be $7,000 / 1,400 visitors, which gives us our CPC of $5.00.

Using our CRM, we know we received $5,700 in sales from the campaign. We divide our sales of $4,700 by the 1,400 visitors, giving us an EPC of $3.35

With an CPC of $5.00 and an EPC of only $3.35, that campaign is not profitable and should not be renewed.

Example 2:

In this example, we are running an advertising campaign on a local online marketplace. The advertising is costing us $3,200 per month to run and we have been receiving 1,258 visitors from the campaign. We calculate our CPC to be $3,200 / 1,258 visitors, which gives us our CPC of $2.54.

Using our CRM, we know we received $4,720 in sales from the campaign. We divide our sales of $4,720 by the 1,258 visitors, giving us an EPC of $3.75

With a CPC of $2.54 and an EPC of $3.75, the campaign is very profitable and we should allocate more funds. We can also determine the profit of the campaign to be $1,522.18.

(EPC – CPC) x Total Visitors
($3.75 – $2.54) x 1,258 = $1,522.18

We can see how ramping up a profitable campaign can compound our sales. If we were able to spend $9,600 per month on this campaign, we would receive $14,152.50 in sales. With this math, we would rinse and repeat this every time.

Conclusion

Although online advertising can be very confusing, understanding the math to profitability can take the guesswork out of your campaigns. Knowing your true EPC empowers you to push your budget into the campaigns that are putting more money in your pocket, and cut the ones that are not.

In our next article, we will dive into marketing ratios and rates to better understand how your customers are interacting with your campaigns and your website.

Keep moving and keep fuelling your business.

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