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Is Your Cost-per-Click Advertising Actually Profitable?

by Glen Hamilton  |  
March 7, 2006

Shopping portals, comparison-shopping sites, and search engines allow merchants to promote increasingly detailed merchandising offers with the goal of cost-effectively increasing brand visibility, acquiring new customers, and driving incremental revenues.

But how does an online retail merchant ensure that third-party shopping destinations and other referral-based merchandising channels contribute to the bottom line?

The answer lies within back-end retail line-of-business systems that handle inventory, purchasing, order, and customer data—systems not traditionally associated with online marketing, but critical to online retail marketing success.

More Meaningful Metrics

The online retail marketer wants to know which combinations of product assortments, channels, and merchandising offers will yield the highest return against key retail planning metrics—which are not typically incorporated into online advertising campaigns or management systems.

Online advertising performance is traditionally measured by click-through rate (CTR), conversion rate (CR), cost per acquisition (CPA) and return on ad spend (ROAS):

  • CTR is the percentage of site visitors that result from an online ad pageviews.

  • CPA is the cost to acquire a new transaction or customer through a marketing channel.

  • ROAS represents the sales revenue generated per dollar spent on an online marketing channel or a given ad within that channel.

  • CR refers to the percentage of referred visits to your site that convert to a sale.

Unfortunately, these de facto standards for measuring advertising performance are misaligned with the most important measures of retail success. What retailers need to know to make informed advertising decisions is how a given product that's promoted through a given channel contributes to key retail metrics.

For retailers, these metrics typically include average order value (AOV), gross profit (GP), gross profit margin (GPM), gross profit margin return on investment (GPROI), gross margin return on inventory investment (GMROII) and life-time value (LTV):

  • AOV ($) = sales / number of orders

  • GP ($) = sales - cost of goods sold

  • GPM (%) = (sales - cost of goods sold) / sales

  • GPROI (%) = (sales - cost of goods sold) / cost of goods sold

  • GMROII ($) = gross profit ($) / average inventory at cost

  • LTV ($) = present value of the gross profit from a given customer over a projected period of time.

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Glen Hamilton is VP of product management at the Mercent Corporation (

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