How to Calculate Conversion Cost?

Regardless of the type of marketing campaign you are running, you cannot track its success without metrics. One of the most important metrics is the cost per conversion or conversion cost, as it lets you see the results of your spending.

Once you learn how to calculate conversion cost, you can do so at strategic times to see your return on investment and decide if you need to do things more efficiently or are on track to meet your goals while sticking to your budget.

What Is Conversion Cost?

Before you can calculate the conversion cost, you need to understand what it is. It is also commonly referred to as the cost of conversion or cost per conversion, the latter of which is commonly abbreviated as CPC don’t confuse it with cost per click.

The cost of conversion essentially lets you determine how much you are spending on average to convert a single customer.

A Quick Note About the Term ‘CPC’

It is worth noting that when dealing with marketing and online campaigns, CPC can stand for more than one thing. In addition to “cost per conversion,” it can also stand for “cost per click.” You can typically tell the difference when it is written about due to context. However, if you are looking at raw data or a chart, be sure that you know which term is being used. To overcome this distinction, you may also see the cost per conversion abbreviated as CPC.

You Define Conversions

The cost per conversion lets you track conversions, no matter how you define them. Common definitions of conversions include purchases, watching a video, or signing up for something. For many campaigns, conversions are resulting purchases.

When you describe your metrics, you can either use the term “conversion cost” or “cost per conversion” and define conversion or label it as “cost per [measurement].” For example, if your conversion metric is sales, you could say “conversion cost (conversions = sales)” or “cost per sale.”

Cost Per Conversion vs. Cost of Acquisition

You have a great deal of freedom as you define conversions for your campaign. In the case of conversions measured by purchases, one of the most common differences is whether you include repeat purchases in the formula. For example, if one customer clicks through your marketing campaign twice and buys something each time, are they one conversion or two?

Although it will depend on how you choose to define conversions, most of the time, that term applies to the number of sales made. So, in the above example, you would count two conversions. If you wanted to count it as a single interaction, you could instead use the cost of acquisition, with acquisition referring to each new customer.
In simple, how much cost is consumed while bringing a new customer for your product or service is cost per acquisition.

How to Calculate Conversion Cost

Calculating the conversion cost just involves simple division. To complete the calculation, you will need to know the number of conversions made as a result of the campaign as well as the total spending on the campaign.

The formula is as follows:

Cost per Conversion = (Total cost of the campaign) / (Number of conversions)

An Example Calculation

For example, assume that you ran an ad campaign that cost a total of $2,000, and you got 50 conversions. To calculate the cost per conversion, you would do the following: $2,000/50 and get $40.

In that example, each conversion costs you $40 on average.

Examples With Various Types of Conversion Metrics

Remember that you can define conversion however you want, such as the number of sales and number of signups for your email list. The following are some of the most commonly used conversion metrics when calculating cost per conversion. Each has its own example of how you would calculate conversions with your given definition for the conversions.

• Cost per Sale: This information will give you an idea of how much you spend on marketing for every sale that you make. It is common to use sales information for several months to get an average.
• Example: Assume you spend $1,000 on a given marketing campaign, and it results in 20 sales. Your conversion cost or cost per sale would be $1,000/20 or $50.
• Cost per Inquiry: This is among the most common types of conversions that companies calculate. It measures how much you spend on average to get someone to contact your company to receive more information.
• Example: Assume you spend $1,000 on marketing and have 50 inquiries. The cost per inquiry would be $1,000/50 or $20.
• Cost per Impression: You will need to have exact numbers on impressions for this calculation, which your analytics may or may not provide. This type of metric is helpful if you simply want to increase your brand recognition and assume that those who view your ad will have improved recognition in the future. This calculation does not require the ad viewers to take any action.
• Example: Assume you spend $2,000 on marketing and 1,000 people see your advertisement. Your cost per impression would be $2,000/1,000 or $2.
• Cost per Page Visit: You are more likely to use this type of conversion calculation if your goal is increasing brand awareness or your profits are based on visits, such as a blogger who sells ad space.
  o Example: Assume you spend $1,000 on advertising and get 100 people to visit your website. Your cost per page visit would be $1,000/100 or $10.

Use Average Figures Over Longer Times When Possible

It is important to remember that numerous factors affect your conversions. This is true whether you want to find the cost per sale, cost per person watching a video, cost per website view, or something else. For example, previous interactions with your brand can play a role. Typically, conversions are more likely if someone already recognizes your brand.

To overcome the influence of other factors in your calculation, you should always opt for averages. Ideally, you want to use figures from a wider period of time. This will allow those additional factors to even out over time.

Of course, that is not always possible, such as in the case of shorter advertising campaigns. Even so, you should always work with as much data as you can feasibly use.

Why Should You Know How to Calculate Conversion Cost?

As mentioned, your conversion cost provides important insights into your budget. There are a few important ways in which you can use the information once you know how to calculate conversion cost.

Confirm Campaigns Are Profitable

One of the most important pieces of information you can get from the values of conversion cost is whether your marketing campaign is profitable and, therefore, worth the effort.

You use the cost per conversion to figure out how much you spend on getting each conversion. From there, you compare this to your average sales per conversion. If your cost per conversion is less than your sales per conversion, great. If it is more, then you want to rethink the marketing campaign in question.

For example, consider a marketing campaign that costs $10,000 and brings you 200 conversions, each of which is a sale. You would calculate the conversion cost or cost per sale at $10,000/200 or $50. If the average amount for each of those new sales is $100, then your campaign is doing well. On the other hand, if you are only averaging $25 per sale, this means you are spending more than you get back in the campaign.

Decide Which Campaign to Focus On

You can then use that information to decide if you should allocate more or less of your marketing budget to the campaign.

You see which of your campaigns have the lowest cost per conversion, preferably compared to high values for those conversions, and focus your efforts and budget on them.

You may even use your conversion cost to decide which campaigns you should eliminate entirely.

Decide Which Campaigns to Improve

Once you calculate conversion costs, you can also use that information to see which campaigns need more work. Maybe one of your campaigns has a high conversion cost, but your team feels that it has a great deal of potential. You could use that information as an inspiration to make changes and see if you can improve it.

Confirm Changes to Campaigns Save Money

Once you do make changes to campaigns, you can use your conversion costs to confirm that your changes were effective. Ideally, the cost per conversion will go down when you make changes to your campaign. At the very least, it should stay the same.

How to Reduce Your Conversion Costs

If you do not like what you see when you calculate conversion costs, then you will want to see what steps you can take to reduce those costs. Some methods reallocate your budget, while other methods increase the total number of conversions or reduce total costs. Remember that after trying these methods, you can track your progress by recalculating the conversion cost and seeing if it has dropped.

i. Evaluate When You Show Your Ads

You can continuously improve your conversion rate and therefore reduce your cost per conversion by adjusting when you show your ads. You may get the best results if you show your ads at certain times of the day or certain days of the week. Save money by not running the ads when conversions are unlikely to occur.

You do not have to guess when your target audience is most likely to be online. Visit the “Dimensions” tab in Google Ads, and you will see when you get the most conversions.

ii. Reevaluate Keywords With Low Conversion Rates

As you calculate conversion, you will also want to look at your keywords. In particular, pay attention to which ones have low conversion rates. See how many clicks they have to see if the conversion rate is good enough for your needs. If it is not, such as just one or two conversions from 1,000 clicks, consider pausing the keyword.

iii. Reevaluate Keywords With High Conversion Rates or Find New Ones

After paying attention to your keywords with low conversion rates, you likely have a bit of extra room in your budget. You can now apply it to the keywords having the best conversion rates.

You should also consider taking this to the next level by finding terms you are not bidding on, but customers are using. To do so, visit the tab called “Search terms” to see what searches result in showing your ads. Try adding some of these keywords if they are not already in your campaign.

iv. Adjust Your Bid Strategy

One of the simplest changes you can make to improve your conversion cost is adjusting your bid strategy. This basically combines the previous two points. If a campaign has a higher conversion cost, reduce your bids for it. Meanwhile, increase your bids for campaigns with lower conversion costs.

v. Use Negative Keywords

As you make adjustments, consider adding negative keywords. These will help reduce your costs for showing ads to people who are unlikely to convert. The result would be less overall ad spend and a lower conversion cost.

Finding the ideal negative keywords for your campaign will take some thought. Consider your customers, including the products or services they are looking for. Then, think about which of those you offer.

For example, no matter the type of product you sell, you could add brands you don’t carry to the negative keyword list. Just keep in mind that you may not want to exclude keywords for brands you do not carry if you have successfully converted people with other brand loyalties in the past.

vi. Adjust Landing Pages

If your conversion goal is more than just a website visit, look at your landing pages. Confirm that the landing page is relevant to the viewers and encourages them to complete the action that is your goal. For example, if your conversion metric is signing up for your email list, the signup form should be prominent. If it is watching a video, the video should be prominent. Keep the pages simple, so viewers are more likely to perform the action you want.

Wrap Up

Learning how to calculate conversion cost is as simple as dividing the total amount spent on a marketing campaign by the number of conversions it results in. Once you calculate conversion, you can use the information to better allocate your budget and improve returns. Or you can use the conversion cost to confirm that your changes to campaigns were effective. In the case of high conversion costs, there is always room for improvement.