Understanding Your Cost Per Lead (CPL) – SEO can be more expensive than Pay-Per-Click

In search engine marketing there are two sides: search engine optimization and paid search campaigns. Search engine optimization (SEO) is the process of aligning elements in the source code of a website with search engine algorithms to achieve higher rankings for frequently queried keyword phrases. Of course, SEO isn’t all about the internal characteristics of a website. External factors, such as number of links pointing to a website, the demand for the keywords that describe your site, and the actions of your competition are also critical considerations in the process.

On the other hand, paid search or pay-per-click (PPC) involves buying a placement for a website listing when a user searches for a specific term. Usually, buyers incur costs on a per-click (CPC) or cost-per-impressions (CPM) basis. For example, a manager of a paid account may choose to pay as much as $4.00 each time a user clicks on a paid ad for the keyword “luxury yacht”. At it’s best, PPC campaigns represent a closed-loop approach to search engine marketing. The flow chart goes something like this: A user enters a search query, clicks on a sponsored advertisement, goes to an especially designed landing page, and does the designated action on the page or “converts” – as the lingo goes.

Contrarily, natural search is not intended to be a closed-loop environment. The goal of a natural search listing, and people may argue with me on this point, is to say “Hey… we think we have the information you are looking for. Come in and take a look at what we have to offer”. The imprecise nature of an organic listing is partially attributed to the fact that webmasters have less control over the properties of a natural search result and subsequent user actions than do managers of paid campaigns. Hence, the terms “natural search” and “organic search”. For example, webmasters have a diminished ability to control when a natural listing will appear, what position it will appear in among the results, what the description of the search engine listing will read, how often the listing will appear for the same identical user query, and which page the searcher will be taken to upon clicking on a listing. This disadvantage is often reflected by lower click-through rates and conversion rates for natural search listings, especially when analyzed in the light of paid campaigns.

So, when is a free click more expensive than a click you pay for? Well, here are two conditions that must be met:
1. Costs are incurred to investigate the qualifications of a lead before a payoff occurs.
2. Your frequency of sign-up (also know as customer acquisition rate) multiplied by the dollar value of a sign-up is less than the total cost incurred to qualify a set of leads.

What?!?! Perhaps an example will help.

An example of an expensive free listing

Here’s a not too outlandish scenario to explain what I’m talking about. Suppose a small auto insurance company sets up a PPC campaign to compliment the natural traffic to its website. Searchers who click on a sponsored ad for the keyword “cheap auto insurance” are taken to a carefully crafted landing page and encouraged to fill out a form to get a free quote. Upon, the completion of the form, a “form complete” conversion is recorded. The company pays $2.00 each time a prospect clicks on a paid advertisement, regardless of whether or not the lead capture form was completed by the user. When the marketing department passes the lead information along to the sales team, the company must absorb a $10 fee to run a quick and dirty credit check to investigate if the customer will be able to maintain the policy over the course of a year. If the customer passes the credit check, then he or she is contacted by the sales team and given the opportunity to purchase the policy.

On the natural side of the operation, when a potential customer searches for “cheap auto insurance” they are taken to 1 of 2 possible core site pages that are 1 – 2 clicks away from a “request a free quote form”. Notice the openness of the marketing circuit. As with the CPC campaign, the same $10 fee must be paid by the company to conduct a credit check in order to fully qualify the lead before the customer is given the option to enroll in the insurance plan.

Now let’s do some calculations based on the table to find ROI:

For the paid campaign, the calculation for profit is as follows:

Profit = total revenue – total click cost – total credit check costs

or

Profit = (clicks * Web form conversion rate * Policy sign-up rate * Value of policy) – (Clicks *CPC) – (clicks * web form conversion rate * credit check cost)

With the actual numbers from the table above:

(100 * .030 * .10 * 200) – (100 * 2.00) – (100 * .030 * 10) = $132.00 = Profit

For the natural campaign, we can use the same formula, but substitute $0 as the cost per click cost because referrals from organic listings are free. Calculations of the profitability of the natural lead channel is as follows:

Profit = (clicks * Web form conversion rate * Policy sign-up rate * Value of policy) – (Clicks *CPC) – (clicks * web form conversion rate * credit check cost)

With the actual numbers from the table above:

(100 * .030 * .030 * 200) – (100 * 0.00) – (100 * .030 * 10) =
-$12.00 = Profit

Analysis and Conclusion

In this example, even in the absence of context, the math tells a compelling story. The profit calculations above reveal the firm’s pay-per-click channel is much more profitable than the natural search channel. Startling still, the company is actually losing money by continuing to operate the natural lead channel under the existing conditions. Although, the click remains “naturally” free, as do the subsequent form completes from an interested user, the prospect qualification cost (the credit check cost) does not. With the influx of unqualified leads, and without an analysis of each channel’s performance, the sales team will inevitably continue to unprofitably pursue leads derived from the natural channel. Thus, a natural click will indirectly cost the firm to burn money when the entire chain-of-events is analyzed as a whole.

One explanation for the unprofitably of the organic lead generation channel in our example is because in e-business profitability is often determined by conversion ratios, and not necessarily by pure cost reduction or profit maximization.

How is this possible? One explanation for the unprofitably of the organic lead generation channel in our example is because in e-business profitability is often determined by conversion ratios, and not necessarily by pure cost reduction or profit maximization. In the example, notice how at a major point in the funnel – policy sign-ups – the PPC campaign converts prospects more frequently than leads from natural traffic sources (10.00% vs 3.00%). In fact, the higher policy sign-up percentage of the paid campaign, recovers the per-click expenditures made on the front-end by creating more policyholders down the line. Like we talked about earlier, the higher conversion rates observed in the paid campaign can be attributed to the greater degree of control granted to the PPC manager. An experienced PPC manager will use this power to his or her advantage to more precisely weed out users who are unlikely to convert for a term, even before the ad is served through careful keyword selection and by toggling match-type settings.

Now, if you were the folks in the example getting shafted on natural leads, should you ignore all “free leads” ? Of course not. Disregarding free leads would represent a severe missed opportunity to create a potentially profitable lead generation device. Remember, in managing your online sales operation, improving conversion percentage should be the first step, and terminating sluggish sales channels should be the last.