Knowing the Value of a Conversion

- May 5, 2010

Do you know the value of a conversion? It may seem like a basic question, but there are many factors to consider.

For example, ecommerce advertisers may determine the actual value of a conversion as the purchase price of an item. If a person buys a $100 widget from your site, then the value is $100. But in the real world we know there are other expenses incurred including overhead, shipping, etc.

If you are participating in online advertising, a way to calculate a value of a conversion is to look at Return on Ad Spend (ROAS). ROAS is simply dollars sold divided by dollars spent.  It means how many dollars you are getting back for every dollar you spend. Going back to our widget example, if an advertiser spent $20 for advertising on that widget, the ROAS would be 5. 100/20 = 5.  For every dollar you spend, you are getting $5.

Return on Investment (ROI) is another way to calculate a conversion’s value. The formula for ROI is (Revenue — Spend) divided by spend. This is a way to determine what percentage of spend you are getting back as profit. If you spent $20 on advertising a widget that sold for $100, to calculate ROI take ($100-$20)/20 * 100 = 400%.  ROI should be as high above 100% as possible. Also, remember to take the lifetime value of a customer into account when examining the value of a conversion.

Regardless of how you measure your success, the important thing is that you are taking steps to track and improve results. Making sound decisions on what efforts are working and not working will surely help to boost your bottom line.

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