3 Questions You Must Answer Before You Start Advertising Online

/3 Questions You Must Answer Before You Start Advertising Online

Many business owners get overwhelmed with all of the options to advertise their product or service online.  There are dozens of ad outlets, hundreds of research tools, millions of keywords and websites to target, and countless strategies that claim to guarantee your success.

But before you get lured down the internet marketing rabbit hole, you need to take a step back and answer 3 critical questions:

  1. How much can you afford to pay to acquire a customer?
  2. How are you going to sell your product or service?
  3. How are you going to track your success?

 

Your answers will steer you in the right direction so you avoid wasting time on strategies and tactics that will not work for your particular business model.

The order of these questions is important so make sure you answer each one before moving on to the next.  For example, your answer to question #1 will limit your possibilities for question #2, which in turn will determine your options for question #3.

So let’s go through each question in more detail to see how this can be applied in your business.  By the end of this article you should have a clear idea for how you can use online advertising to profitably sell your product or service.

 

1. How Much Can You Afford to Pay to Acquire a Customer?

This question seems obvious yet a lot of business owners who are already advertising don’t know the answer.

To truly answer this question, you have to understand the lifetime value of your customer.  If you’re only selling one product, then the lifetime value is going to be the same as the profit from that one product.

However, if you’re selling multiple products and/or ascending customers to higher priced consulting services, then your lifetime value is going to be higher than the profit from that first product purchased.  In this case, you may be able to break even on the first product or even go in the hole a little if you know in the long run you’ll be profitable.

The key point here is that you must know the true lifetime value of your customer and this value determines how much you can afford to pay to acquire a new customer.

Armed with this number, you can now do some very basic math to determine if it’s even remotely possible to profitably advertise online.

For example, if you’re considering Pay Per Click advertising, then you’ll first look at the cost per click (CPC) for the relevant keywords for your product.  Then you can calculate your “break even” conversion rate by dividing the CPC by the value of your customer.

Here’s a quick example:

  • “sell ebooks” has a CPC of about $2 according to Google’s Keyword Tool
  • let’s assume every customer for your service to help sell ebooks is worth $200
  • therefore, you’ll break even with a 1% conversion rate ($2/$200 = 1%)

A break even conversion rate below 2% is what we’re looking for so this passes the first test. Over time you’ll be able to drive down the CPC, improve the conversion rate, and even increase your customer value so this looks promising.

However, if the value of your customer is only $50 and the CPC’s are $10, then your break even conversion rate is 20%.  That’s just not going to happen.  So you either have to considerably increase your customer value or look for alternative advertising opportunities because PPC isn’t going to work.

 

2. How Are You Going to Sell Your Product or Service?

Once you know the basic metrics are going to work, then it’s time to determine the best selling strategy.  There are many different strategies, but when you’re first testing advertising I recommend you pick from one of these 3:

  1. Advertise directly to your sales page
  2. Advertise to a free trial and then upsell to your paid product/service
  3. Advertise to free information or a tool and then upsell to your paid product/service

 

If you’re just starting out and you’re not sure how to make money with an email list of prospects, then I strongly encourage you to start with strategy #1.  This is the most direct way to test an advertising campaign because there are less moving parts.

Strategy #2 can work well for subscription and software as a service (SaaS) business models. In this case you would advertise to a free trial offer to give your prospects a taste of your product or service and then upsell your trial subscribers to paying customers.

It’s absolutely critical that you have a clear understanding of your conversion rates if you’re going to test this strategy.

Let’s use the same example as before and say you’re advertising a service to sell ebooks.  In this case you’re sending traffic to a free trial offer, which intuitively will have a higher conversion rate than a sales page (because it’s free).

So again, we need to do some basic math:

  • $200 customer value
  • $2 CPC
  • guesstimate 20% free trial conversion rate
  • cost per free trial = $10
  • break even free trial to customer conversion rate = 5%

 

Those numbers look OK, but you’ll have to keep a close eye on the free trial conversion rate.  If that number is really closer to 10%, then you’ll know it’s probably not going to work because that would require a 10% trial to customer conversion rate.

If you’re familiar with email marketing, then you probably noticed I’m missing a key variable in my basic model above.  It’s highly likely you’ll be able to monetize your list of free trial subscribers who never convert to paid customers.  You can do this by offering your own complimentary products or services or by selling other businesses products or services as an affiliate.

This brings us to strategy #3, which is to advertise free information or a tool in exchange for an email address and then upsell to your paid product or service.

If you understand your email marketing metrics, then this can be a very appealing strategy.

I’ll use the same example above and you can substitute “free trial” with “free report” or whatever else you’re offering in exchange for the prospect’s email address:

  • $200 customer value
  • $2 CPC
  • $1 value of a prospect email address (by selling your other products or affiliate products)
  • guesstimate 20% free trial conversion rate
  • cost per free trial = $10
  • net cost per free trial = $10 – $1 = $9
  • break even free trial to customer conversion rate = 4.5%

 

As you can see, by utilizing email marketing you can improve your chances of making your ad campaign profitable.  Now we only need a 4.5% trial to customer conversion rate to break even.

But you can also see that this gets complicated quickly, which is why I typically recommend starting out with strategy #1 unless you’re confident in your email marketing abilities.

 

3. How Are You Going to Track Your Success?

There’s no way to measure your success without proper tracking in place.  At the most basic level you need to track your sales back to the ad, keyword, or website.

For strategy #1 above, the key metrics to track are:

  1. sales (i.e. conversions)
  2. clicks
  3. sales/click = conversion rate
  4. click through rate
  5. cost/sale
  6. cost/click

 

Most ad outlets have built in conversion tracking that will give you all of the metrics above.  In addition, Google offers free analytics that is very simple to set up.  I recommend you install Google analytics in addition to the ad outlet conversion tracking to give you more insight into your website visitors.

If you’re testing strategy #2 or #3, then you also need to track the following metrics:

  • free trial conversion rate (or email opt in rate)
  • cost/email
  • value/email
  • sales/trial

 

For email metrics, you may be able to use your email marketing program, Google analytics if you set up Goal Tracking, or maybe a combination of your analytics program and your customer relationship management (CRM) system like Salesforce.

Regardless of your particular setup, it’s important to have a system to track and monitor the key metrics in order to measure your success.

With proper tracking, it will become very clear if you have a problem and you’ll be able to isolate exactly where you can improve. Without tracking, you’re flying blind and there’s no way to know how to improve your campaign.

I hope you now have a better understanding for what it takes to create a profitable online advertising campaign.  If you have any questions or comments, post them below.

 

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By | October 4th, 2011|Categories: Uncategorized|

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