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.

What is the Traffic Acquisition Cost for Google?

Earlier this year, TechCrunch reported that Google could be paying up to 1 billion dollars to remain the default search engine on Apple's iOS devices. Part of their reasons for doing this might just be that the cost of acquiring traffic is on the increase due to increased competition from the likes of Microsoft's Bing service.

The underlying question is : why should Bing (and others) matter to Google's TAC?

The answer is fairly simple. Google, Bing and others do deals to put their services on platforms as a default search provider. They pay money to be able to do this, and to hit the platforms with the highest penetration (Blackberry, iOS, etc.) they need to have deep pockets.

If they miss out on a platform, they have to work doubly hard (and pay more) to entice those 'lost' customers back to their service, as well as having a smaller customer base to start with. Even if advertising (or R&D) costs stay the same, the TAC would go up if they lost one of the key platforms.

According to TechCrunch, Google's actual TAC for 2013 is estimated at 3.3 dollars per iOS user, and is something like 5% of gross revenue across all platforms, which includes iOS and Mozilla, as well as Chrome/Android.

Now, obviously, the increasing penetration of Android, Chrome, and other Google platforms and products going forward will have an impact on Google's TAC, but unless iOS sales drop, that won't save them from paying absurd amounts to Apple, for the slightly dubious privilege of being the default search provider.

What can other businesses learn from this? Firstly, you need to make sure that your TAC is balanced by lifetime customer value. In other words, knowing your TAC per 100 dollars ratio (or similar) will be vital in helping you to understand if it is as efficient as it could be at retaining customer value.

The forEntrepreneurs website has a great graphic illustrating this key ratio. In essence, you can exchange CAC (cost to acquire customers) with TAC, factoring in your conversion rate as you go along.

It's interesting to note that Google has the R&D investment to increase several areas of the equation without shelling out to third parties (through open source participation, viral effects, and strategic partnerships that don't involve the exchange of real money), but that clearly their management puts a lot of stock in their core offering - the free search engine service.

That service drives the Google engine; and that includes opening up revenue opportunities. So, investing 1 billion dollars in keeping a high flow from established and emerging platforms makes good business sense, whilst also demonstrating the power of free.

How Keyword Research Helps Reduce Traffic Acquisition Costs

One of the key questions on all content producer's minds is "how can I reduce my traffic acquisition costs?"

There are some easy answers - pay people less for content designed to pull in visitors, blanket bomb the social networks with a variety of split-tested messages, and use tools to target the lowest priced PPC keywords that have the highest raw return.

But none of these are particularly efficient. They may well drive up visitor numbers, but anyone playing around with Google Analytics will quickly realize, by looking at the Visitor Flow diagram, that the quality of visitor will be falling.

In short, they won't stick around long enough to make a purchase, and they won't come back.

The underlying reason for this is simple : there hasn't been enough keyword research, and as such the visitors that are being captured don't have a real interest in what the site has to offer. You're just pulling in more people with the hope that some of them are interested, whereas an efficient traffic acquisition drive will aim to pull in traffic where the majority of the visitors are interested in what you have to offer.

If you think that sounds obvious, then do me a favor. The next time you go on a traffic acquisition drive, track the conversion rate. 99% of the time, no matter who is managing your traffic acquisition project, it will begin to dip, even as the visitor numbers climb. So will your repeat visitor ratio. As will the time spent on page.

In short, stickiness will fall. And the further it falls, the less profit per visitor is being made. And the cost per visitor therefore begins to climb, which makes the TAC (traffic acquisition cost) look a lot less attractive!

To counteract this, make sure you do your keyword research. Now, as I pointed out on the Keyword Cracker blog post 'The Future of Organic SEO', Google is, on the face of it, about to make this a whole lot harder with the retirement of their AdWords Keyword Tool.

But I think that it's a blessing in disguise, because it will force (persuade?) people to put more emphasis on the context of the keywords that they use, and to re-examine the actual keywords that are bringing in traffic now, rather than trying to second guess what people might be looking for in the future.

So, fire up Analytics (or just look at the Blogger/Wordpress/Squidoo/HubPages/whatever stats) and start your keyword research there, instead. Then try to pick out areas that people are interested in, but that you don't cover explicitly.

Use those in the next traffic acquisition drive, and you should see a rise in effectiveness over previous campaigns, making it that little bit more cost-effective.