A mathematical formula to predict the success of a campaign before running it?
I am not a PPC marketer so I may have got something fundamentally wrong but let's entertain the idea.
Let's suppose I want to run a campaign for a website, and I can estimate the average CPC, average conversion rate and average customer lifetime value. I think based on these three variables; we can estimate the long term ROI of the campaign based on these ideas:
- A user converts on a website with the probability of conversion rate.
- If a user converts, we get revenue equal to customer lifetime value - the cost for ad click
- The probability of non-conversion is simply 1- conversion rate
- If a user does not convert, we just pay the cost of ad click
Since the mean is linear, we can calculate long term ROI as follows:
Long term ROI=(Avg Conversion rate)( Avg customer lifetime value - Avg CPC)-(1-Avg conversion rate)(Avg CPC)
If it is negative, we know for certain, we will be losing money eventually, if its positive that will be our long term ROI. The conversion rate, lifetime values and CPC do not have to be fixed themselves, those can be random variables too as long as we can estimate or project their means from historical data.
Does my idea fundamentally make sense?
Edit:
Okay, so I ended up creating a simple app based on the idea: