PPC conversion rates: why they matter

Posted by Josh on Friday, July 24th, 2009.

Over the years we have managed a lot of pay-per-click campaigns for a variety of clients. Some of them have a thorough understanding of conversions, while there are still a lot that don’t. It is still surprising to find companies that only measure the success or failure of their AdWords campaigns (or less often Yahoo! or adCenter) based solely on CPC or total clicks. This can be tremendously misleading in terms of profit, ROI, or even failure of a campaign to deliver any worthwhile traffic.

Let’s consider an example. A golf shop sells clubs online and wants to pay a maximum of $1.00 per click for all clicks, regardless of any other factors. This implies that people who searched for “used golf clubs” are worth the same amount as those looking for “new golf clubs.” If they looked at conversion rates, they would see that people are much more likely to buy new equipment online than used because they know what condition it will be in. This might justify a higher bid for the new equipment and lower for used.

Let’s say the golf shop is most interested in appearing in the top ad position, regardless of cost. They know it gets the most clicks, and they also figure there is some recognition benefit they get even from people that don’t click on it. Suppose it costs $4 per click, and they only make $20 profit on a set of used clubs. They need to convince at least one in five people to buy the used clubs. This is extremely optimistic. If they could track conversions, they would quickly find out that they might get less than a few percent of ad clicks turning into purchases.

Examining conversion performance instead of just advertising performance can provide valuable baseline data for other sources of leads. For instance, if your PPC conversion rates are much higher than the traffic you generate from an email campaign, that suggests that you could improve the effectiveness of the emails or the landing pages that they lead to. Similarly you might find that PPC underperforms natural search. This is very rare, and it suggests that your PPC campaigns need significant improvement.

Not all companies can easily define a measurable conversion such as a download, a signup, or a purchase. But there are usually intermediate steps that can still be more useful than simply relying on clicks, cost, CPC, or CTR. We’ll cover these in future posts.