How to Calculate Traffic Acquisition Cost ROI

All traffic acquisition comes at a cost: either real or in terms of opportunities you lose by spending time just trying to get those hits in rather than working on your business.

For example, read through Yahoo's experiences with climbing traffic acquisition costs in 2015.

Although they technically made more money, with a 350% rise in TAC they were left with a loss instead of the profit they had previously enjoyed. There were a lot of factors that entered into the equation, but TAC remain the bane of a lot of pure web businesses existence.

But, is it worthwhile?

In Yahoo's case, the then-CEO Marissa Mayer thought so. She cited the fact that Yahoo was a business 'in decline' and that the narrowing margins were the price to pay for increased visibility. That story did not end particularly well, and Yahoo is now part of the newly formed Yahoo Verizon business vehicle.

From Verizon's point of view, despite not getting the discount they initially sought, a 4.5 billion dollar price tag would argue that the increase in visibility, users, and, in short, customers and traffic (opportunities to make more customers) has a fair bit of residual value.

We're not all Yahoos, or Verizon's, though, but calculating your ROI on TAC is still important.

Let's assume you sell physical objects, and advertise through Facebook and AdWords. For these services, you pay a click fee. Each time a user clicks your advert, and is delivered to your sales page, it costs you money.

A percentage (and I hope a high percentage) of those views become sales. The questions you need to answer are simple:

• How much does each sale make?
• What is the lifetime value of the customer?
• What is the conversion rate?

From these questions, you can create two useful metrics. The TAC ROI and the LTAC ROI.

The basic TAC ROI (traffic acquisition cost) is simply the cost of making a sale. If you pay out $100 in AdWords fees, and generate $200 of sales, then your ROI is double your investment. On the other hand, if your sales do not even cover your advertising costs, then you will enter negative ROI territory.

This may not matter if your Lifetime TAC ROI is higher.

And, it can be much, much higher. In fact, if you sell printers, for example, you can well afford a negative ROI on the sale of the printer if your lifetime value of the customer is linked to excruciatingly high ink cartridge prices.