Warren Buffett once said “Price is what you pay for; Value is what you get.”
This means the price does not define the worth of an item. Ask Lexus and Cadillac. Both brands offered hybrid versions of their highly desired vehicles, the Lexus LS450 and the Cadillac Escalade. The prices for the vehicles are significantly higher than their gasoline counterparts. The MSRP of a Lexus LS hyrbid starts at $106,000 while a gas-only LS starts at $63,825. So an owner is paying $40,000 for reduced gas consumption and better gas mileage, a difference that causes some to wonder if the choice is a poor economic one. Is a green image worth $40,000? For now the answer appears to be no, since Lexus and Cadillac are offering rebates on these hybrid models up to $10,000. You can read more about the hybrid rebate here at Autoblog.
I use the hybrid example of value to drive a point about overpaying for value, what you want or expect. Closer to the world of online marketing, the same sensibility can be extended to pay per click. Many business owners seek more traffic and conversions from SEO and PPC, but much thought is paid to how to value a bid? Is a PPC bid worth the cost?
Anastasia Holdren, of Sitening, put some real thought into that question and has developed a great method of valuing the worth of a click. A certified Adwords consultant, Anastasia teaches an excellent Adword training seminar (sponsored by the good folks at Google). She has managed web development projects, email marketing campaigns and search engine marketing (SEM) projects for clients including Osram Sylvania, Harvard Business School Executive Education, Cannondale, Air Jamaica, and countless others.
According to Anastasia, the Value Per Click (VPC) should be calculated. This means dividing the profit before advertising costs by the number of clicks. Say you make $100 gross profit. Take the amount and divide it by the number of clicks received in the same period, say 5. So $20 per click is the VPC. It is the maximum bid value; Exceeding it is essentially overpaying for profit-generating traffic! Again, price is what you pay for…value is what you get.
This approach is brilliant — it is similar thinking to valuing a stock against the expected cash flow from company earnings. This approach contributes a significant piece to the analytics puzzle — users must rely on analytic solutions to confirm the cost effectiveness of a campaign, to adjust the campaign accordingly, and accordingly, increase the value of their website, and increase the chance for profits.
What do you believe are any addition best practices for valuing the clicks your receive? Feel free to share here.