HomeBusinessWhat is Conversion Cost (Example, Formula and Importance)

What is Conversion Cost (Example, Formula and Importance)

Costing is of utmost value in any business. After all, it determines everything, ranging from the product (or service) pricing, and the profitability. Yes, the production cost is arguably more important than other aspects of your business — the production cost pretty much determines how the business operations will be. Speaking of business operations, you’ve got to put conversion costs into consideration.

Before diving into how to calculate conversion costs, you’ve got to know what they are.

Conversion costs are aggregated costs like manufacturing overhead cost, and direct labor. In simple terms, conversion costs are costs incurred while converting raw materials into finished products.

Well, that’s the general definition of conversion cost. But as a digital marketer, the conversion cost is the total ad cost relative to the success of attaining the advertisement goal. Experts also call it cost per conversion.

Moving on, here is how to calculate conversion cost.

How to Calculate the Conversion Cost

Calculating the conversion cost is not rocket science. If you have a good grasp of simple arithmetic, then you can do the maths.

But first, you’ve got to know the total amount spent on your ad campaign, and the total number of conversions generated by the campaign. If your figures are in order, then you’ve got to take a close look at the formula.

The conversion cost formula pretty much helps you to identify your spending, return on investment (ROI), and the wastage of your campaign.

The conversion cost formula is;

Conversion cost = (Total cost of your campaign) / (Number of conversions).

For instance, if you’re a Facebook (or Google) ad specialist, and you run a campaign on a $5,000 budget that generates 125 conversions. At the end of the campaign period, you can calculate your cost per conversion by merely doing simple arithmetic as shown below.

Conversion cost = $5,000/125

= $40.

That is, your cost per conversion is $40.

Why is it Important to Know Your Cost Per Conversion?

Conversion cost provides insights on how to manage your budget. If you’re still in doubt, here is why you should know your cost per conversion.

  1. It Shows the Right Campaign to Focus On

Cost per conversion helps you to know if you are to channel more resources to your campaign. That is, it helps you identify the right campaign that has the lowest conversion cost. This will, in turn, help you focus your marketing energy on such campaign(s).

Furthermore, conversion costs help you to identify the right campaign to stop. If a campaign is not profitable, you will see it — and possibly channel your marketing budgets to other campaigns.

  1. Shows Profitable Campaigns

Since conversion cost helps you to identify the total dollar amount spent on each conversion. By identifying the amount spent on each conversion, you can pretty much identify profitable campaigns.

Here’s how to do that…

Conversion cost shows you the average amount spent on each conversion. You can compare the figure with the average sales per conversion. If the average sales per conversion are greater than the conversion cost, then you’re on the right track. If the reverse is the case, then you’re better off focusing on other campaigns.

  1. Shows the Right Campaign to Focus On

After determining the profitability of your campaign, you’ve got to either focus on it or stop the campaign. Campaigns with lower conversion costs would probably be more profitable. And as a marketer, you can opt to focus on these campaigns.

  1. Shows the Campaign to Improve

If you know the conversion cost, you can use the information to pinpoint the campaign to improve on. Sometimes, campaigns with great potential may have high conversion costs. In such cases, you can merely take a closer look at it and improve on it.

  1. Helps to Save Money

Conversion cost helps you determine if changes made in a campaign are effective. Ideally, if the right changes are made, the conversion cost will go down. This will, in turn, help you to save money.

What are the Examples of Conversion Costs?

Conversion cost is not limited to the total number of conversions. There could be other conversion metrics like sales, inquiries, impressions and page visits.

Conversion costs for sales (or cost per sales) involve the total amount spent for each sale made. For instance, if you spend $2,000 on a campaign, and generate 50 sales, the conversion cost (or cost per sales) will be.

$2,000/50

= $40.

Conversion costs for inquiry (or cost per inquiry) show the average amount spent for each customer that reached out to your company. For instance, if $3,000 was spent on your company’s marketing, and 80 inquiries were made, the conversion cost (or cost per inquiry) will be.

$3,000/80

= $37.5.

Conversion cost for impression (or cost per impression) is helpful for marketers who desire to boost their brand recognition. Sometimes, your analytic dashboard will not provide the exact numbers of impressions. If you spent $1,000 on ads to drive 500 eyeballs, then the cost per impression will be.

$1,000/500

= $2.

Cost per page visit pretty much shows the average amount spent on each page visit. It’s vital for marketers who desire to boost their brand awareness. If $2,000 was spent on ads to generate 400 visits to your web page, then the cost per page will be.

$2,000/400

= $5.

FAQ:

What is a Good Cost Per Conversion?

There is no clear-cut answer to this — it all depends on other factors like your product (or service) offering, your industry, and the kind of campaign you are managing. Although there are experts who claim that the average cost per conversion for searches is $48.96, while the cost per conversion for display is $75.51.

Benefits of Calculating the Conversion Cost

Generally, the conversion cost helps you to figure out how your ad campaigns are doing. If it’s high, then something could be wrong with your ads. It could be that your ad copy isn’t compelling enough, or you are targeting the wrong people.

However, if the conversion cost is low, then you’re doing something right — it could be you’re targeting the right audience, or your ads are properly optimized.

Conclusion

Conversion costs pretty much show you everything — and it’s an important piece that helps you make informed business decisions. These calculations help you to know your numbers — you get to know vital metrics like the cost of acquiring a customer, or the cost of driving an eyeball to your website.

All in all, it helps to pinpoint areas to channel your marketing energies.

Now you’ve got a good grasp of what conversion costs are, what conversion cost example appeals most to you?

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