Many performance marketers continue to consider click-through rate
(CTR) as a key performance indicator of their search campaigns’
effectiveness and evolve their PPC optimization strategy around that.
At the end of the day, what matters most is achieving the best ROI
given your business objectives and budget, and you might optimize
directly to CTR or ROI or a combination of success metrics to achieve
that.
In order to have the best optimization strategy for your SEM
campaigns, it is important to understand and quantify the influencers of
ROI.
The Two Extreme Optimization Strategies
There are two types of strategies performance marketers consistently use as their campaign optimization strategy:
1) Optimizing To A CTR Goal
One of the main factors influencing
Quality Score
(QS) is CTR, which affects your cost-per-click (CPC) and in turn
affects your ROI. An increase in QS due to a boost in CTR would lower
CPC and improve ROI.
2) Optimizing To An ROI Goal (Revenue-Per-Click & Cost-Per-Click)
Direct optimization to revenue or a conversion metric is a common
strategy amongst performance marketers. Making sure an intelligent bid
management is in use will be crucial to your campaign’s success.
While perhaps no marketer
purely optimizes to CTR or ROI,
they tend to skew towards one of these camps. Each method has its pros
and cons. A CTR strategy will get you more clicks but does not guarantee
the highest ROI. A purely ROI approach will get you the highest ROI but
you potentially lose out on customers early in the sales funnel who
might eventually convert.
ROI Breakdown
ROI equals Revenue-Per-Click (RPC) over Cost-Per-Click (CPC). Data
analyzed from over two dozen advertisers using econometric methods (a
simplified version of the equation is shown below) shows that 34% of ROI
is influenced by RPC and 66% by CPC.
Bid management is by far the most important influencer of ROI.
Forty-nine percent (49%) of ROI is influenced by bid management, 13% by
other factors (i.e., marketplace, seasonality, etc.), and 4% by CTR. The
data show the importance of having an intelligent bid management
strategy in place for your SEM campaigns. But, does this mean a CTR
maximizing strategy is a wasted effort?
A Deeper Dive Into The Relationship Between ROI & CTR
Previous studies have looked at the relationship between CTR &
ROI by purely relying on correlations. A correlation analysis alone
cannot determine the effects of CTR on ROI, and a more robust
statistical technique is required to answer that question. These
techniques enable us to control for all the factors that can potentially
influence ROI.
From the chart below, we
do see a relationship between the CTR & ROI — but not a very strong one.
Applying statistical modeling techniques will allow us to quantify
any statistically significant relationship between the two if it exists.
In this model, I control for position, CPC, industry, and bid
management differences across the different advertisers in the data in
addition to CTR.
The results show that there is a statistically significant
relationship between CTR and ROI; but in terms of impact, it’s quite
small. For a 10% increase in CTR, expect to see a 1.2% increase in ROI.
This means that if you increase your CTR from 10% to 11% for a campaign
with an average ROI of $5, the ROI will increase to $5.06 due to the
improvements made in CTR.
Key Takeaways For Performance Marketers
- Campaign managers should utilize both strategies above in optimizing
their campaigns; main focus should be on ROI but do not completely
ignore CTR
- 49% of ROI is influenced by bid management; intelligent bidding is integral to a campaign’s success
- CTR does have a small but statistically significant impact on ROI; a 10% change in CTR affects ROI by 1.2%
In Summary
Focus on optimizing your SEM campaigns for ROI but keep an eye on
CTR. There is no need to purely optimize to CTR as it influences only 4%
of ROI; but, it is important to account for it in your longer term
strategy and make sure healthy CTR rates are met and maintained.
Intelligent bid management heavily influences ROI and is absolutely necessary to ensure your ROI goals are met.