What Do You Mean by CPC?

cost per clickThree letter acronyms abound in marketing, and there are few more confusing than CPC. In fact, these three simple letters are the source of four distinct metrics: Cost Per Click, Cost Per Conversion, Cost Per Acquisition, and Enhanced Cost Per Click:

  1. Cost Per Click: Used exclusively in online advertising, CPC in this instance refers to how much an advertiser is charged each time someone clicks on their ad.
  2. Cost Per Conversion: This type of CPC is used in online advertising, but also in other digital marketing channels. It measures how much you pay for a completed action, a conversion, which could be a purchase, a download, starting a trial, etc.
  3. Cost Per Acquisition (CPA): CPA is the cost of acquiring a customer. This one is often confused with cost per conversion, but it’s specific to acquiring a paying customer rather than completing a conversion that might not be tied to a purchase.
  4. Enhanced Cost Per Click (eCPC): Once again a metric that’s exclusive to online advertising, specifically Adwords. eCPC tracks which search terms tend to lead to a conversion for your account and bids more aggressively on those terms.

Here we’ll dive into each of these four metrics individually to analyze how they are calculated, their unique value, and when you should use them.

Cost Per Click (CPC)

In Adwords and other online advertising channels, you typically pay each time someone clicks on your ad. The amount that you’re charged for a single click is the “cost per click,” and it’s where PPC (pay per click) advertising gets its name.

How to Calculate Cost Per Click

In a nutshell, CPC (cost per click) is very straightforward:

Total ad spend/total clicks = cost per click

In Adwords there are two even more specific types of CPC, average and maximum, which you can use to adjust bids.

Average CPC takes the cost for all of the clicks on your ad in a given period and averages them out:

Total cost of all clicks\total number of clicks received = Average Cost Per Click

Many forces combine to affect your average CPC, including:

  • the competitiveness of your advertising niche (“smartphone” is a more sought-after keyword than “houseplant,” for example)
  • your daily Adwords budget
  • how well optimized your PPC campaign is
  • what (if anything) you’ve provided as a maximum cost per click

Maximum CPC is an arbitrary number put in place by an individual advertiser, and it indicates the highest amount that advertiser is willing to pay for a single click.

The number you choose for your maximum CPC should be directly related how competitive your particular keyword set is.

If it’s too low you won’t ever get clicks because you’ve basically bid yourself out of the market.

Value of Measuring Cost Per Click

Being able to measure ads this way is a valuable tool for PPC marketers because it lets us know which specific ads are earning us clicks. This knowledge allows us to make fine adjustments to ad copy for better performance.

Cost per click also clearly demonstrates which keyword searches are driving clicks, allowing us to remove underperforming keywords from our PPC campaigns and get more bang for our advertising buck.

Although always interesting, this type of measurement is the most useful when you’re primarily interested in driving traffic to a particular page or section of your website.

If your goal in using a PPC campaign is to actually drive a visitor to action (downloading an ebook, becoming a member, or starting a trial), then the other CPC (cost per conversion) may be a better metric.

Cost Per Conversion (also CPC)

When you need to know how much you spent to achieve a specific goal outside of a click, then it’s time to use cost per conversion.

Cost per conversion is a common metric in PPC advertising, but its applications aren’t limited to this channel alone. You can measure cost per conversion on a video, an infographic, or email campaign as long as you have a reasonably accurate figure for the campaign’s expenses.

How to Measure Cost Per Conversion

So, cost per conversion is measured like this:

Sum of Marketing Costs / Total Conversions = Cost per Conversion

Cost per conversion is pretty easy to measure in an Adwords campaign because you can easily track both cost and, if you’ve set them up correctly, conversions created directly from an ad.

For example, let’s say I’m running ads for “Hard to Kill Houseplants.” My conversion occurs when a visitor signs up for my weekly plant care newsletter; I know it’s happened because they reach a, “Thank You for Subscribing” page.

Let’s say it took me 50 clicks at $1.25 each ($62.50 total) to get 6 conversions. Then my cost per conversion is $10.41.

If the newsletter conversion is worth just $2 to me then that’s a problem, and that’s why it’s important to distinguish cost per conversion from cost per acquisition (which we’ll discuss in the next section).

Value of Measuring Cost Per Conversion

As we saw in our houseplants example, knowing the value of both clicks and conversions can give you additional insight into the effectiveness (or lack thereof) of an online ad campaign.

Cost per conversion can also help you determine the value of marketing campaigns outside of PPC, such as a video marketing campaign.

If you paid $5,000 for a professional video that was posted on YouTube, and your analytics revealed that 200 people purchased your $15 ebook after viewing that video, your cost per conversion for the video is $2.50.

$5,000 (sum of costs) / 200 (conversions) = $2.50 (Cost Per Conversion)

Since your ebook sells for $15, you made a profit of $12.50 on each one.

If you were running a similar campaign via Adwords and only tracking clicks, you probably wouldn’t be able to see how valuable that video really was in driving ebook sales. All you’d know is how often people clicked on the ad, not how many of those people eventually bought an ebook.

Distinguishing Cost Per Acquisition (CPA) from Cost Per Conversion

In the ebook example above your cost per conversion and cost per acquisition would be the same because a conversion was the same thing as acquiring a customer.

If, however, we were tracking video viewers who became Facebook fans as well as those who made a purchase, we would have separate metrics for CPC and CPA (cost per acquisition).

Cost per conversion can refer to the cost to achieve any marketing object, like becoming a Facebook fan.

CPA, on the other hand, is how much it costs to acquire a customer, that is, to complete a sale.

“Cost per Conversion is great for answering the question, ‘What does it cost to get this newsletter subscription?’ But you also need to answer the question, ‘How many newsletter subscribers do I need, on average, to make a sale?’ This is Cost per Acquisition.”1

How to Measure CPA

In order to accurately measure your cost per acquisition you need to know the average value of your customer over time.

There are lots of complex formulas out there that take into account purchase frequency, average order volume, and more, but a good simple starting point is:

Yearly Revenue/Yearly Customer Count = Average Revenue Per Customer

Once you know your average revenue per customer, you can then divide that number by how much you’re paying to acquire that customer to determine your CPA:

Average Revenue Per Customer/Total Cost to Acquire 1 Customer = CPA

To accurately determine how much it costs you to acquire that customer you definitely need well-established tracking methods.

You need to be able to monitor a customer down from a click or page view all way through to purchase; if that ends up requiring multiple touch points via an ad, a video view, and a personal phone call, then that’s an expensive acquisition.

If most of your acquisitions only take a visit to your homepage and then a follow-up email, they’re not nearly as costly.

Of course if your average revenue per customer is up in the hundreds or even thousands of dollars, a few extra steps to acquire them isn’t a big deal.

Value of Measuring CPA

Many digital marketers look to CPA as the holy grail of metrics because it tells us, in real dollars, what we’re earning through our efforts.

It’s more precise than either cost per click or cost per conversion, because it’s directly connected to a purchase of some kind.

Cost per click lets you know how much it cost to get someone onto a landing page, but it doesn’t tell you whether or not they moved deeper into your sales process from there. If you’re getting hundreds of visitor to a pay per click landing page but making no sales, then you’re not delivering any value.

Tracking CPA ensures that you are focusing on the all the vital pieces of the sales process.

One Last CPC: Enhanced Cost Per Click

In the world of PPC advertising, in addition to cost per conversion and cost per click, there’s a third way to track the performance of your ads: eCPC.

eCPC within Adwords stands for enhanced cost per click, and it allows Google’s algorithms to adjust your cost per click bids to try and target users who are more likely to convert for you.

Google explains it like this: “eCPC looks for ad auctions that are more likely to lead to sales for you, and then raises your max CPC bid up to 30% (after applying any bid adjustments you’ve set) to compete harder for those clicks.”2

How to Measure eCPC

Like many things that Google does, they’re not giving away precisely how eCPC is calculated. All they’ll say is that their algorithm learns when it’s a good time to show your ad.

They give this example in their help documentation:

“Imagine that your job is to stand outside a barber shop and bring in new customers. If a businessman with shaggy hair comes walking by, you give him a big wave and a hello. If a bald man walks by, not so much.”2

They say that you should see better conversion rights when using eCPC, or they may be equal to the conversions you get with your own maximum CPC bid, but they certainly won’t be worse.

Value of Enhanced Cost Per Click

When it works like it’s supposed to, eCPC can do a lot of the Adwords heavy lifting for you. If you don’t have the time to constantly adjust your own bidding strategy, eCPC may be great.

Since it’s a Google-run tool operating in the Google universe (at least when it comes to search ads), then it’s a good bet that it will perform well.

Don’t despair if you don’t see a double digit bump in conversions as soon as you turn it on. Although sophisticated, it will need at least a few days to log enough clicks and conversions for significant numbers to act on.

This is especially true if you have a very low budget and therefore very few clicks for the algorithm to work with.

What to Do With So Many C’s

There are a lot of acronyms in this article, and a lot out there in the world of marketing metrics. But the important thing when tracking a campaign is to take a step back from it and decide exactly what you hope to get out of it.

Determine what would make the campaign a success, and then figure out how to measure that.

Whether it’s based on a conversion, a sale, or a click doesn’t really matter, as long as you’re confident that it’s providing a good return on your investment.

C is for Cookie

Sources:

  1. Why Cost per Acquisition is the Only Metric That Really Matters
  2. Google Adwords Help

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Andrea Fryrear
About the Author:

Andrea Fryrear

Andrea loves to dissect marketing buzzwords and fads looking for the pearls of wisdom at their cores. Her favorite topic is agile marketing, which she believes holds the key to a more fulfilling (and less stressful) marketing career for individuals and a more powerful marketing department for business. When not scrutinizing the latest agile methodologies, Andrea can be found on the volleyball court, at the park with her two delightful kids, or baking “calorie-free” cookies. Connect with her on Twitter @AndreaFryrear, or on LinkedIn.




Leave a Comment

  • NJ

    cpc is the cost per click meaning the amount you will or willing to pay per click. this is really important in buying traffic as it tells you how much your spending. its really important to be tracking you cpc so you can find out how much you are making which is your epc.

    • Thanks for chiming in, NJ. You’re right – tracking CPC is a vital part of any online advertising campaign.

      FYI, we did have to remove the link you originally put in your comment, as we don’t want to encourage self-promotion within our comments section. Disqus lets you associate a website with your account, so if people like what you have to say they can find your website easily. Please feel free to contact us if you have any questions.

  • Dan

    To add to this:

    “Many digital marketers look to CPA as the holy grail of metrics because it tells us, in real dollars, what we’re earning through our efforts… Tracking CPA ensures that you are focusing on the all the vital pieces of the sales process.”

    That said, I wouldn’t turn on CPA targeting with Google! Here’s some interesting rationale behind why that’s a bad idea: Should You Target a CPA in AdWords?

    • Afryrear

      Thanks for sharing, Dan!