In this section, I will be teaching you math! I know this sounds intimidating but don’t worry this is not rocket science and you will not be learning calculus. We are talking about simple Grade 3 Math. You may think you know everything about Grade 3 Math and you don’t need to go through this module. If so, you are absolutely wrong. There are definitely some math equations and terms that you need to know before you start building your online business.
If you are unable to master these math calculations, you will potentially bring yourself into bankruptcy—which is what happened to me. I did not understand the importance of math back when I was working on my first multi-million dollar business. However, I took it as a lesson and I was able to create my own, very simple financial statement. I’ve used this financial statement for all my businesses and it is very simple as it does not require you to know any accounting.
I will provide you with this simple financial statement and will also show you how to use it. Not only will you be learning math in this module, but there will be lots of hidden gems on how you should operate your online business. One of the hidden gems is called leveraging, which will help you grow your business faster without a lot of cash in the beginning.
Now that you know how important this simple Grade 3 Math is, let’s get started!
CPC stands for Cost-Per-Click, which means how much it will cost you each time someone clicks on your ad. In search advertising, CPC is the best bidding strategy because you are only paying for qualified traffic, that is, people who are interested in your product or offer. You want to make sure your CPC is lower than your earnings-per-click (EPC), in order to ensure you are making money each time someone clicks on your ad. There are many factors that affect CPC such as your ad’s click-through-rate (CTR). The higher your CTR is, the lower your CPC. We will discuss more EPC and CTR below.
To calculate CPC, simply divide your total advertising cost by the total number of clicks your ad received.
CPC = Total Cost of Advertising / Total Number of Clicks
Example: You spent $100 on advertising and your ad received 500 clicks. Your CPC will be: CPC = $100/500 = $0.20 per click
EPC stands for Earnings-Per-Click, which refers to the amount of revenue you earn each time someone clicks on your ad. If your EPC is greater than your CPC, you will immediately know that your campaign is profitable.
To calculate EPC, divide your total amount of revenue by the total number of clicks your ad received.
EPC = Total Revenue / Total Number of Clicks
Example: Let’s say you earned $1,000 in revenue and your ad received 500 clicks. Your EPC will be: EPC = $1,000/500 Clicks = $2.00 per click
CPM stands for Cost-Per-Thousand. The M stands for 1,000 in Roman numeral. It refers to the cost of every thousand impressions or times your ad appears.
CPM pricing strategy is commonly used for display and Facebook advertising. However, practically all advertising channels use CPM, even if you are running a CPC campaign. What happens is that the advertising network will internally calculate a CPM that advertisers are not aware of. This is why if you have a high click-through-rate on your ad, the cheaper your CPC will be as everything is based on CPM or impressions. Now, the question is which bidding strategy should you use, CPC or CPM?
To give you a better idea, I will use an example..
Peter and Bob are competing for 1,000 ad impressions on Facebook. Since all ad networks sell their ad inventory in a bidding auction, it is fair to believe that whoever pays the most will win. Unfortunately, this is not entirely true because ad networks consider other factors as well such as your ad’s CTR, regardless of the bidding strategy the advertisers are using.
Let’ say Peter is bidding on $3.00 CPM for 1,000 ad impressions on Facebook. Peter’s ad CTR is around 0.75%. Bob is bidding on $0.50 CPC and his ad CTR is also around 0.75%.
Now who do you think will win the ad auction? Let’s look at it from Facebook’s perspective.
Facebook will make $3.00 from Peter for 1,000 ad impressions, regardless of the ad’s CTR.
For Peter, here’s how the calculation looks like:
CPM x 1,000 Impressions = Cost to Advertiser
$3.00CPM x 1 Impressions = $3.00
On the other hand, Facebook has to look at Bob’s CTR because for every 1,000 impressions that Facebook gives to Bob, they don’t know how much they will make from him.
For Bob, we need to work our way back to calculate a CPM or effective CPM (eCPM) to compare:
CPC x CTR x 1,000 Impressions = eCPM (Cost to Advertiser)
$0.50 x 0.75% x 1,000 Impressions = $3.75
As you can see, Bob will win the ad auction because Facebook will make $0.75 more with Bob than Peter. In order for Bob to keep winning the ad inventory, he has to maintain his CTR. If Bob’s CTR drops, Facebook will grant Peter the ad inventory.
An example of this is if Bob’s ad CTR drops down to 0.55% at $0.50 CPC:
$0.50 x 0.55% x 1,000 Impressions = $2.75
Now, Facebook will earn $0.25 more with Peter than with Bob. Thus, Peter will receive the 1,000 ad impressions instead.
eCPM stands for Effective Cost-Per-Thousand. In this scenario, effective means earning. eCPM means how much will you earn for every thousand times your ad is shown. With the eCPM calculation, you can go out and buy any related targeting placements that have a lower CPM than your eCPM. This will give you a benchmark on whether a specific placement is going to be profitable or not. If you have campaigns with a higher CPM than your eCPM, you can just forget about it or try to negotiate for a cheaper CPM.
eCPM = Total Revenue / (Number of Impressions / 1,000)
CTR stands for Click-Through-Rate, which is a ratio expressed in percentage to show how often people who see your ad click on it. You always want to achieve a high CTR to maximize every impression your ad receives and lower your ad cost.
Each advertising channel uses different factors to determine your ad’s CTR. For instance, Facebook considers your ad’s relevancy score based on users’ feedbacks and Google uses your ad, keyword, and landing page relevancy to determine your ad’s CTR. Many advertisers claim there is an industry average. However, the average doesn’t really mean anything to you because it is skewed with different data. Just keep in mind your targeting, ad message, and placement of your ad can affect the CTR significantly.
To calculate CTR, divided the total number of clicks by the total number of impressions your ad received and multiply by 100.
CTR = (Total Number of Clicks / Total Number of Impressions) x 100
Here’s an example of why CTR is so important in advertising and how you can maximize your advertising cost. Let’s say we are using CPM bidding and the CPM we are bidding on is $1.50.
With a slight increase in your CTR, your CPC decreased by around 16.67% and you are getting a lot more clicks. This means you are getting more sales and your cost remains unchanged. Because of the effect that CTR can have in your business and your bottom line, you have to always split-test your ads to attain a higher CTR.
LCV, which stands for Lifetime Customer Value, is a prediction of how much net profit a business is able to generate during an entire future relationship with a given customer or lead. This metric is very important to help businesses optimize their marketing and even product development strategies, as well as determine how resources should be allocated to keep their customers and make them happy. Unfortunately, LCV is often overlooked and businesses are missing out on potential profits. You will only be able to calculate a LCV if you have your own offer or if you are generating a list. To calculate LCV, divide the total amount of revenue generated in a lifetime divided by the number of lead or customers.
LCV = Total of Revenue Generated In Lifetime / Number of Lead or Customers
For all of my businesses, I like to use a period of 90 days to calculate my Lifetime Customer Value. You can set how many days you want that will make sense to your business. But for me, 3 months is a good tracking period as anything after that are just pure profits and I don’t want to leverage my advertising dollars over a 90-day period.
To explain what I mean by “leveraging my advertising dollars”, let’s consider the following examples.
Let’s say I sell a digital product for $100 and I make $100 net profit on the product. Keep in mind I am not accounting for any refunds or processing fees just to keep things simple. Based on my advertising, my cost-per acquisition, that is, the amount it costs me to acquire a new customer is $120. This means for every new customer I acquire, I am losing $20. This is true if you only consider this on day 1. However, the customer that has bought from me is now in my email list, which I can use to send promotions. During the 90-day period, I have sent out 6 promotions. Each promotion will give me $100 net profit once a customer makes a purchase. Suppose a customer purchased products from me during 2 out of 6 promotions. This means, during the 90-day period, I actually make $300 in total ($100 from the first product + $200 from the two promotions). When calculating the LCV, I made $300 per customer. If I deduct my cost-per-acquisition of $120, I made a total net profit of $180 per customer!
I haven’t talked about leveraging advertising dollars yet. Before we go on, I need to make this really clear as the risk is a lot higher than anything else and you MUST have your financials in place with a clean accounting book.
Since we live in the century of credits and credit cards, we should probably leverage that to the maximum. I am sure many of you do not have a huge amount of cash to invest into advertising right away. If you have a profitable campaign after you have calculated your LCV and you want to scale your campaign, one way is to use your credit cards or credits. It will enable you to scale your business much faster than just waiting for the cash to be deposited to your account. I need to emphasize you should use this strategy at your own discretion. I am not telling you to mortgage your house or use your credit card to the point you are in debt.
Now let’s continue with the same example. This time suppose you are generating 5 new customers every day (35 in a week) and for each new customer you acquire on day 1, you need to allocate $20 on advertising ($700 in a week). Your customer makes a second purchase from you on day 30 and another one on day 90.
Note: 1 week has 7 days.
*Your second sale comes in after you acquire a customer 30 days later.
†Your third sale comes in after you acquire a customer 90 days later, which includes your 30-day sale.
At the end of the 90-day period, I basically made a total $26,600 in Net profit. However, this financial only looks pretty once we consider the fact that we get our money right away once a sale is made. Sadly, this will not occur often unless you have a really great relationship with the bank or the owner of the offer you are promoting. As long as you are able to show volume and quality, you can negotiate daily payout deals. In the beginning, this is extremely hard. But if you can do this, hats off to you!
As an affiliate, you usually get your money 1-month later. With that being said, you would need 1 month of advertising dollars in order to leverage all this. This is where you use your credit cards and credits. You will need to have a credit total of $50,400 per month to advertise and pay it all off immediately after you got your first check. If you don’t pay it off right away, you will be charged with interest and your income will decrease dramatically because credit card fees are expensive. This is why I keep stressing that there’s high risk if you are using this leveraging method.
Now this same scenario also applies to being an affiliate with an email list. It works exactly the same way. Rather than selling your own products, you keep maintaining your list and sending your customer/prospects different offers on a regular basis.
If your business is at this stage, I can guarantee you will be earning a lot of money and your business will just grow exponentially. This is exactly how big corporate brands work at a retail and traditional business world.
CPL stands for Cost-Per-Lead, which refers to how much it costs you to acquire a lead (i.e. a prospect). CPL is particularly important if you are doing a lead generation campaign. Your CPL has to be less than your LCV in order to have a profitable campaign.
CPL =Total Cost / Number of Leads
CPA stands for Cost-Per-Acquisition or Cost-Per-Action, which tells you how much it will cost you to acquire a new sale. For you to maintain a profitable campaign, your CPA should be less than your commission or your LCV. If you are working with a CPA network, CPA stands for how much you get paid per acquisition. In other words, CPA is your commission.
CPA = Total Cost / Number of Sales
CPS is similar to CPA but refers to Cost-Per-Sale. Some offers will give you a CPS rather than a CPA if there are different product packages. Most offers are in CPA or a fixed percentage of sales, but some choose to do CPS. CPS has a different payout based on what package your referred customer purchased. There is no formula or calculation for this. It is a term that tells you how much money you make per sale.