The formula
budget = (sales ÷ conversion rate) × cost per click
What it means
It is the campaign metrics question in reverse: instead of working out what the cost per sale turned out to be, you start from the target and arrive at the budget. The chain has three links — clicks, conversion and cost per click — and the answer is only as good as the conversion rate you feed it, which is the figure almost nobody has measured before starting.
How to work it out by hand
- Divide the target sales by the conversion rate: those are the clicks
- Multiply the clicks by the cost per click: that is the budget
- Divide the budget by the sales: that is the cost per sale
- Compare it with the margin each sale leaves
What is worth knowing
ROAS misleads, and this is the trap that costs the most money. It compares revenue with spend without taking off what the product costs: on a 20% margin, a ROAS of 4 still loses money, because of every four units of revenue only eighty cents are margin. The figure that decides is the maximum cost per sale, which is the gross margin each sale leaves: if the cost per sale goes above it, the campaign sells and loses. And a warning about the conversion rate: if you have not measured it, run a small campaign to find it out rather than estimating it.