As I wrote about in a previous Net Profit, online advertisers are rushing to apply metrics to their marketing programs. Measuring return on investment, costs per acquisition, costs per conversion and other marketing benchmarks have become all the rage around the marketing department’s boardroom table.

One vital number to keep in mind is your maximum cost per visitor. It’s amazing how many companies that are spending thousands or even millions on snagging online visitors don’t know what the maximum is that they can spend on a per visitor basis. Once you have this number, choosing and evaluating cost effective ways to bring new customers to your site will become much easier.

To begin to calculate this number, you’ll have to go in armed with some information, or at least, some educated guesses.

Your Website’s Closing Rate

If you have an e-commerce site, determining the closing rate will be simple. Just take the number of sales transactions and divide by the number of visitors. If it’s not this straightforward, you’ll need some other numbers in order to calculate it.

Traffic Conversion Ratio

First, you want to see what percentage of your website visitors become “converted” visitors. These are visitors who express an interest in your product or service, either by emailing for more information, submitting a form or taking some other action on your site. The ultimate conversion, of course, is an actual purchase on an e-commerce site.

One conversion action that may be difficult to track will be people calling on a toll free line. If all your marketing is done through the website, you can assume that every phone call is a conversion, but if the number is promoted through other marketing, it will be difficult to separate out the leads. For this reason, you may want to reserve a toll free number specifically for website contacts, or, at least, assign a tracking extension to this number that is used on the website.

Example:

To make this easier, let’s set up a step by step example. In this case, we’ll use a company that sells high end spam and internet access filtering software for corporate network applications. They don’t sell on line, but there are a number of ways that interested customers can contact the company for more information. The company examines their visitor logs for the past 6 months and sees that they average about 125 unique visitors to their site per day. They also look over their past contacts from the web site. When the various forms of contact are added up, it averages about 18 contacts per day. The conversion ratio of the site is 18/125, or about 14.5%.

Closing Rate from Conversion

Once a visitor becomes a “converted” visitor, they become a sales lead. Again, if your only measure of success is online sales through an e-commerce site, you’ll skip this step, because each conversion on your site is also a closed sale. For other companies, you’ll need to be able to track the sales process to determine your closing rate on web initiated leads.

Example:

Going back to our example, the Company has found that of the leads generated from their site, they close about 15% of them. So, we had an average of 18 leads generated a day, and a closing rate of 2.7 sales a day. Remember, the Company had about 125 unique visitors a day, so 2.7 sales represents an overall closing rate of 2.16%

Average Revenue per Transaction

The next number you’ll need is your average revenue per web site initiated transaction. If you’ve been tracking the source of your leads, this should be a fairly easy number to calculate. Just take the average sale amount that results from lead generated by your website.

If you have a client base that tends to be regular purchasers of your products, sell an ongoing service or a monthly subscription, you’ll have to also calculate the average lifespan of a client, because you want to base your calculations on the lifetime value of your customer, not just the first purchase.

Example:

The product sold by the Company is paid for monthly at a cost of $75 per month, with a one time set up fee of $500. The average lifespan of a client is 18 months, so the total average value of each new client is approximately $1850.

Marketing Allocation as a Percentage of Revenue

Now, you’ll want to take the percentage of your total revenue that you want to allocate towards marketing. Obviously, if it costs you one dollar of marketing budget to attract each dollar of revenue, you’re not going to stay in business long. When calculating this percentage, you’ll have to look at your overall business model. For instance, if website sales represent incremental income over your traditional sales channels, and your overhead on the web sales is far less, you may be willing to allocate a larger percentage of each web sale to marketing. Lower overhead is generally a benefit of selling online, and for this reason marketing percentages are usually higher than in bricks and mortar operations. While 5 to 15% is usually the range for marketing budgets in traditional businesses, online business are often willing to go as high as 10 to 25% or even more. You’ll know where your margins are.

Example:

Our example Company has fairly high margins on their products and relatively low overhead. For this reason, they’ve determined they’re willing to allocate 15% of total revenue generated by the website to marketing.

Putting the Numbers Together

We now have everything we need to calculate our maximum cost per visitor. The formula is fairly simple.

Maximum Cost = Average Revenue x Percentage for Marketing x Closing Rate

Example:

Let’s plug in the numbers for our Company.

$1850 (Average Revenue) x 15% (Percentage for Marketing) x 2.16% (Closing Rate) = $5.99

$5.99 is the maximum that this client can spend to get a customer to the site.

Shopping for Visitors

Now, let’s see what that number means in some real life scenarios.

If the client wanted to do some CPM banner advertising, they would be probably be paying in the neighborhood of $30 per thousand impressions. Standard click through rates for banner ads are in the 0.3 to 0.5% range. Let’s split the difference at 0.4% That means that each person attracted to a site through the banner ad will be at a cost of $7.50. That puts it out of range for this particular company. Of course, click through rates, conversion rates and the actual CPM rates will vary and will affect the final performance. The numbers I’ve used are published industry averages.

CPC Banners

With Cost per click banners, the guess work of conversions is taken out of the equation. You’re only paying for the actual visitors to your site. In this case, a cost per click of $5.99 or less is within the budget. Average cost per clicks range from $0.25 to $1.00 per visitor.

CPC Search Listings

The going prices for keywords on Overture range from $1.90 for “web filters” to $3.37 for “internet filters”. All are within our company’s budget.

SEO

Calculating the cost effectiveness of search engine optimization is always a more complicated procedure. In this case, let’s assume the Company is paying an SEO firm $800 a month. A quick search of prime keywords in this instance shows that there are about 45,000 searches monthly for the top relevant keywords. A reasonably successful SEO campaign should allow the Company to capture 5% of that traffic. 2250 search engine visitors at a cost of $0.35 each would be a bargain and falls well within the allocated maximum cost per visitor.

The Maximum Cost Per Visitor is a Moving Target

Just when you thought the process was a fairly straight forward one, I’ll throw you a curve. The factors that go into calculating your maximum cost per visitor are all dynamic and that means this is a moving benchmark. Here are some of the factors that will affect it.

Conversion Rates Differ

Not all referral sources have the same conversion rates. Some will deliver higher quality traffic than others. Ideally, you’ll need a web analytics program like Traffic to monitor this so you can make adjustments as necessary and specifically monitor each traffic source and keyphrase. Independent studies have shown that search referrals tend to have the highest conversion rates.

In addition, when it comes to search engine marketing, different keywords will have different conversion rates. More specific, relevant terms will have much higher conversion rates than terms that are more generic and slightly "off topic".

Closing Rates Also Differ

Like conversion rates, closing rates can differ as well. In addition to referral sources having impact on your closing rate, you’ll also find that your site has a major impact on your closing success, as well as your maximum cost per visitor.

As an example, let’s say that our example Company did a major site redesign that improved their closing rate from 2.16% to 4.2% That would increase their maximum cost per visitor from $5.99 to $11.65

Bottom Lines

Calculating your maximum cost per visitor and continually updating it will make it much easier to apply real success metrics to your website and online marketing campaigns. It will allow you to budget effectively and know which online marketing channels you can use and which will not be cost effective.

Remember, however, that this exercise is a first step. Consider the general maximum cost value that you come up with by using the method outlined as a yard stick. If you're ready to wade into in depth analytics and measuring the performance of your website accurately, you'll have to be prepared to calculate your maximum cost on a referral source by referral source, keyword by keyword basis.