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Online Banner Display Advertising and ROI Calculations.

If you are thinking about creating an online marketing campaign or you currently have one running, you’ll want to know the ROI for those efforts. If that’s the case, then this post is for you.

Most online display advertising networks are priced on a CPM basis (cost per thousand impressions). And a lot of times those CPM’s are high. So how do you know if you are getting your money’s worth?

If you’re looking for branding and exposure, then things are difficult to measure. You are putting yourself out there and hoping it works. You hope revenues increase. Sure, you can measure clicks, but what if your goal is not clicks? What if you have a banner ad campaign for a new movie release. The goal is not getting people to go to the website, the goal is to get people to go to the movies!

However, if you do have an action you want to happen, a product to sell, an action you want to measure, then I can tell you how to calculate the ROI on a banner advertising campaign. Tell you if it’s worth it.

Let’s look at a typical example. You sell Ryan Howard Phillies Jerseys. You sell each jersey for $85 on your website. You have a few banner ads and you’re looking for the best websites to promote your products. You think PhilliesTalk.com would be perfect. You contact the website and they tell you the CPM is $10 and you can have 1,000,000 impressions for the month of June. Should you do it? Let’s find out.

First we will calculate the cost. Since the cost is on a per 1,000 impression basis, you need to divide your total 1,000,000 impressions 1,000 which equals 1,000. Multiply that by the CPM $10 and your cost for the month of June is $10,000. You are going to spend $10,000 in advertising in June. Let’s hope this works.

(Impressions / 1,000) x $CPM= spend

If you are going to spend $10,000 and you make $85 per jersey, you are going to have to sell 118 jerseys to break even on revenues (not counting costs and profits).

$Spend / $Revenue or $Profit = Breakeven

Now, here is where you have to estimate figures based on historical data. When people come to your website, how many purchase a jersey? In other words, how many people convert (make a purchase).

This conversion rate may vary from search engine conversions to display advertising conversions. For example, a person who types “Ryan Howard jersey” or “Phillies Jersey” into a search browser has a better chance of buying a jersey from you than someone seeing your ad on a random baseball website. Search engine customers are specifically looking for your product. Banner advertising just gets your product in front of someone who might want to buy a jersey. The point here is that the conversion rate will be lower.

Let’s say your conversion rate is around 10% for search engine traffic. You could probably feel somewhat comfortable with a 5% conversion rate for display advertising. However, the best way to get an accurate rate is to test websites before committing to $10,000 ad spends. Maybe test sites on the Google content network or start with smaller websites first. Once you have some data, you can use the conversion rate for future decisions.

However, for this example we will use 5%. Safe for now. So, you are going to sell a jersey to 1 out of every 20 people who come to your site. If you need to sell 118 jerseys to break even, that means you need 2,360 people to come to your site. (20 x 118).

So, out of your 1,000,000 impressions, you will need 2,360 to click on the ad and come to your online store. Now you can calculate the CTR (click through rate). 2,360 / 1,000,000. You need .236% to click on your ad. Please note the decimal point. This is about .25% or a quarter of 1%.

Do the ads on that particular site get that type of click through rate? Do your ads get any where near that type of click through rate on other sites? In other ad networks? On a search engine content match program? Again, historical data will really help tell you how many people click on your ad when they see it.

So the answer to this question is, you need a .25% click through rate and a 5% conversion rate to break even. If you think this is attainable, then a $10 CPM works. If not, it doesn’t.

Maybe you think a 5% conversion rate is too high. Maybe it’s more like 1%. Let’s see if that works. You need 1 out of every 100 to buy a jersey, so you need 11,800 people to come to your site (118 x 100). That means you are going to need a click through rate of 1.18% (11,800 divided by 1,000,000). If you don’t get this click through rate, you can’t make this media buy.

Again, historical data for click through rates and conversion rates will really help with these decisions.

Let’s take this one more step and then we’ll wrap it up. I know this is a long post, but it’s VERY important. So, let’s say you know your conversion rate is 1% from past data. And your click through rate is usually .25%. Can you pay $10 CPM for this buy? No. We’ve figured that much out. But, what can you pay CPM for advertising on this website?

Well, out of the 1,000,000 impressions .25% are going to click through to your site. That means 2,500 people are coming to visit. And out of those 2,500 you are going to sell jerseys to 1% of them or 25 of them. If you sell your jerseys to 25 people you are going to make $2,125. So for 1,000,000 impressions, you can only afford to pay $2,125 at most. Therefore the best CPM you can pay is $2.13 CPM.

Do you sell a product that goes for more than $85? Then change the Revenue Per Action (RPA) to your revenue per item and re-calculate the numbers. Do you sell a product for less? Use that number. Remember, the above numbers are just examples.

In summary…
• The CPM is given by the website
• The Revenue per product is determine by you
• The CTR will have to be based on past data or estimated
• The Conversion rate will be based on past data or estimated

1. Take the CPM and calculate the Total cost = (Impressions / 1,000) x $CPM
2. Calculate the break even. Total Cost / revenue per item.
3. Take your Conversion rate to determine how many visitors needed = (Break Even items / Conversion rate)
4. Calculate needed CTR = Visitors / impressions.

So what have we learned besides the facts that CPM’s are high? Before you EVER make a CPM purchase for an ROI campaign (selling a product, or needing an action), you need to crunch numbers. You need to know (or have a very good estimate) of your conversion rate and a CTR. Once you have these figures you can calculate the desired CPM of any online display advertising spend.

If you want to know what kind of CPM you can pay for web site advertising campaigns, which we’ve discussed, here is a summary of the steps.
• Impressions x CTR = visitors to site
• Conversion rate x visitors to site = number of sales
• Number of sales x Revenue per sale = total break even cost to advertise.
• B/E cost x (Impressions available / 1000) = B/E CPM

Good luck with your banner display advertising decisions. And please, this can get confusing and complex, so feel free to ask questions in the comments section. It well help other readers as well. Or if you’d rather, contact us with questions.

Categories: Display Advertising
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