Someone asked, why are advertisers obsessed about Cost Per Click?

The postulation was that at best CPCs could indicate high or low competition in the auction. It could possibly indicate the influence of a poor quality score (keyword, ad content, landing page relevance).

I agree that CPCs could possibly help with the above elements. CPC is, even in the best case scenarios, a diagnostic metric (for any marketing strategy).

CPC is not a Key Performance Indicator.

Sadly, many companies/agencies use CPCs as a KPI.

This results in narrowing the vision of the company. It almost always set’s the company on a wrong path (to becoming less glorious than they deserve to be!).

Here’s one corrosive manifestation: I only want to pay $2 max CPC.

Or: We have to reduce our CPCs by 15% this quarter.

Both lead to the same outcome: You cut off your legs to try to run faster.

An obsession with CPCs ignores important considerations like the hundreds of thousands of customers you will leave for your (delighted) competition.

Here’s what you should actually care about: Profit Per Click.

Even if all you can muster up is the supremely easy to compute Gross Profit Per Click.

If you are making a profit, why do you care if the CPC is $40 or $4?

Let’s say you are paying Bing $40 per click. This delivers a revenue of $200 and a profit of $50. That is a win.

If there are any more clicks left to get from Bing, go all the way to $49 per click to get even more customers. You are still making money.

Instead, let’s say you decide to pay Bing $20 per click. Sure, your CPC looks better. Maybe your boss loves you for 24 hours. After that period your profit reports will come in and show that company profit dropped massively. Less love from your boss. Maybe even the opposite of love.

That’s what I mean by cutting your legs off to try to run faster.

Oh, and when you disappear are all the customers going stop running queries? Of course not, they’ll simply click and convert with your competitors.

An even smarter strategy.

Once you know your profit by silo (Search/Bing above), the next level smart thing is to consider this question: Can I invest that $40 anywhere else (billboards, television, AOL) and make more than $50 in profit ?

If the answer is yes, with that $40 you can make $60 with billboards strategy. Shift money from Bing PPC strategy to billboards.

If the answer is no, keep spending it on Bing.

Classic portfolio management.

Bottom-line: Let the profit you make drive your marketing investment strategy. It seems hard to get to real profit, but see the post I’ve linked to above to compute Gross Profit. It is a simple stepping stone. If your boss insists on CPC as a KPI, you know it is time to refresh your resume for how long can a company focused on CPCs survive? :)

.#givemeprofitorgivemedeath

-Avinash.

PS: You’ll understand now why CPA is also a terrible KPI. You want PPA. Or, even better, its sexier cousin PPH.