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The great thing about digital businesses is the ability to set up a test-case for success. You would be amazed at how many online businesses don’t follow this step, and how it makes online ad spend not much different from traditional ad spend—all based on generic data and speculation.

It all starts with the cost of customer acquisition
Sounds simple enough. How do you calculate how much you are willing to pay online? This can be answered by outlining how much value you can assign to the business and profits which an average client brings to you. Let’s say you make an average of $100 for each sale you make. That automatically sets your CPA somewhere between $10 and $20. How did I came up with this number? Well, usually businesses allocate about 10 to 20 percent of their sales revenue to advertising. But it’s not a hard and fast rule. If your profit margins allow, and you are currently in a phase where shelling out 30 to 40 percent is not a big deal, you can go for it.

What about LTV – Lifetime Value?
Most businesses rely on repeat business, and therefore calculating your ROI based solely on CPA may not be the best shot. If the same customer is likely to purchase from you again, or if you can up-sell and cross-sell items, it makes sense to find out how to calculate your LTV.

As a general rule, I still believe that your CPA should not exceed 20% of your sales revenue. That way, any LTV you get is a bonus and will bring your ad spend down to 10% or maybe lower. I believe 10% is the sweet spot to be in.

Equation Breakdown

  • Impressions – All the customer touch-points including search, display, organic, email, etc.
  • Clicks – shows actual intent. How relevant the intent is depends on your choice of channel selection and overall campaign effectiveness.
  • Conversion – could be a direct conversion, like an e-commerce sale, or a pre-conversion like a lead form, chat engagement, download, etc.
  • Impressions: your focus should be to increase and log as many impressions as cheaply as possible. Which sources could give you a large volume of impressions at a low cost? Google search ads, display network, and a combination of social websites would give you a good head-start.

Creatives are more important than you think
If you are like most businesses, you would either spend too much or too little time doing this. You can follow all the general best practices of good advertising—writing good copy, a good visual, call to action—but it won’t be perfect the first time. Even if it is, you won’t know until you compare it with another creative. For best results, you should test at least three variations. A good creative will increase your CTR, and significantly bring down your cost of clicks.

Landing Page Experience
Once you get a click, once your creative has done its job well, it’s time to worry about providing your user with the best experience possible—and enticing them to take your desired action. This is a complex set of variables and requires efficiency on both creative and technical ends. Some of the key flags on the technical side are a good hosting provider, your content management system (CMS), mobile optimization, page speed, and browser compatibility.

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