The Value of a Click
The price that a vendor should be willing to pay for someone to click through to their website is very much a math exercise - luckily a fairly simple one. The questions you need to answer in order to calculate the value of a paid visitor are:
1) What is the average price point of your product? Or better yet, what is the present value of all future revenue from my average customer?
2) What percentage of that price (or value) am I willing to spend to find that customer and remain profitable? (This is often in the 20% to 50% range, but can certainly vary from company to company.)
3) What percentage of your leads convert to sales?
4) What percentage of your web visitors (particularly those acquired from paid campaigns) convert to leads?
Multiple these 4 numbers together and you arrive at the limit of what you should be willing to spend per click. Here's an example:
Software Company XYZ sells a software product that has an initial price point of $10,000 and they charge an annual maintenance fee of $2,000. Considering interest rates and that they lose some customers over time, they determine that the total present value of any new customer is $15,000.
They are willing to spend 40% of that figure to acquire a new customer.
10% of their new leads convert to sales.
20% of their paid web visitors convert to leads.
Multiplying $15,000 by .4 by .1 by .2 results in a maximum price per click of $120 that they are willing to pay. So imagine their ROI when they are able to pay just a few dollars per click?
1) What is the average price point of your product? Or better yet, what is the present value of all future revenue from my average customer?
2) What percentage of that price (or value) am I willing to spend to find that customer and remain profitable? (This is often in the 20% to 50% range, but can certainly vary from company to company.)
3) What percentage of your leads convert to sales?
4) What percentage of your web visitors (particularly those acquired from paid campaigns) convert to leads?
Multiple these 4 numbers together and you arrive at the limit of what you should be willing to spend per click. Here's an example:
Software Company XYZ sells a software product that has an initial price point of $10,000 and they charge an annual maintenance fee of $2,000. Considering interest rates and that they lose some customers over time, they determine that the total present value of any new customer is $15,000.
They are willing to spend 40% of that figure to acquire a new customer.
10% of their new leads convert to sales.
20% of their paid web visitors convert to leads.
Multiplying $15,000 by .4 by .1 by .2 results in a maximum price per click of $120 that they are willing to pay. So imagine their ROI when they are able to pay just a few dollars per click?
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