Step-by-Step Guide to Calculating Conversion Value

Step 1: Determine Average Order Value (AOV)

1. Identify the total revenue generated from a specific product or service over a set period (e.g., a month).
2. Divide the total revenue by the number of orders placed during that same period.

For example, if your monthly revenue is $10,000 from 100 orders, your AOV would be:
$10,000 / 100 = $100 per order

Step 2: Estimate Customer Lifetime Value (LTV)

1. Determine the average number of times a customer repurchases from your business.
2. Multiply the AOV by the average number of repurchases to calculate the LTV.

If a customer typically makes 5 purchases, your LTV would be:
$100 (AOV) x 5 (repurchases) = $500

Step 3: Calculate Conversion Rate

1. Divide the total number of conversions (e.g., sales or leads) by the total number of ad clicks.
2. Multiply the result by 100 to get the percentage.

If you had 50 conversions from 1,000 clicks, your conversion rate would be:
(50 / 1,000) x 100 = 5%

Step 4: Determine Value per Click

1. Multiply the LTV by the conversion rate (as a decimal) to get the value per click.

Using the examples above:
$500 (LTV) x 0.05 (conversion rate) = $25 per click

Step 5: Set Up Conversion Tracking

Follow Google's step-by-step guide to set up conversion tracking:

1. Sign in to your Google Ads account.
2. Click the Tools and Settings icon, then select Conversions under Measurement.
3. Click the plus button to create a new conversion action.
4. Follow the prompts to specify your conversion type, value, and tracking method.
5. Install the tracking code or tag on your website.

Source: Set up conversion tracking

Step 6: Assign Conversion Values in Google Ads

1. Navigate to the Conversions page in your Google Ads account.
2. Select the conversion action you want to edit.
3. Click Edit settings and choose a value for each conversion based on your calculated value per click.

Additional Tools and Resources

Google offers a helpful Conversion Value Calculator that simplifies the process of determining your conversion values. By inputting metrics like AOV, LTV, and conversion rate, the tool automatically calculates the estimated value per conversion.

Benefits of Accurate Conversion Value Calculation

• Measure the true return on investment (ROI) of your Google Ads campaigns by considering the full value of each conversion.
• Optimize your bids based on actual conversion values, ensuring you're not overspending on low-value clicks or underbidding on high-value opportunities.
• Allocate your advertising budget more effectively by prioritizing campaigns and ad groups that drive the highest-value conversions.
• Make data-driven decisions to improve your Google Ads performance, such as adjusting targeting, ad copy, or landing pages based on conversion value insights.

Advanced Concepts and Continuous Improvement in Conversion Value Calculations

Methods to Calculate Conversion Value

There are several methods to calculate conversion value, each with its own merits and use cases:

• Historical Data: Analyze past sales data to determine the average value of a conversion. For example, if your total revenue last month was $10,000 from 100 conversions, your conversion value would be $100.
• Average Order Value (AOV): Calculate the average value of each transaction. If your total revenue is $50,000 from 500 orders, your AOV is $100. This is a good baseline for conversion value.
• Customer Lifetime Value (CLV): Estimate the total value a customer brings over their entire relationship with your business. For instance, if a customer typically makes 5 purchases of $100 each, their CLV is $500. This is useful for considering long-term value.

Let's look at an example. Say you run an e-commerce store selling shoes. Historical data shows an AOV of $80. However, you know customers often buy multiple pairs over time, with an average CLV of $240. In this case, using CLV for conversion value may yield better long-term results in your Google Ads campaigns.

Using Google's Conversion Value Calculator

Google provides a helpful Conversion Value Calculator to estimate conversion values based on key inputs:

1. Navigate to the calculator page and click "Get started."
2. Input your average order value or revenue per purchase.
3. Estimate the percentage of customers who make a repeat purchase.
4. Enter the average number of times a repeating customer buys from you.
5. Estimate your average customer lifespan in days.
6. The tool will calculate an estimated conversion value considering the lifetime value of initial and repeat purchases.

For example, let's say your AOV is $50, 20% of customers repeat, repeat customers purchase 3 times on average, and your average customer lifespan is 365 days. The calculator estimates a conversion value of $80 ($50 initial + $30 future value).

Examples and Case Studies

Let's walk through a hypothetical case study. Imagine you manage Google Ads for a subscription-based software service. Your monthly subscription fee is $99, and customers typically remain subscribed for 12 months. In this case, your conversion value based on CLV would be $1,188 ($99 x 12).

However, you also offer a discounted annual plan at $999, which many customers choose. Taking a weighted average, you estimate the actual CLV to be around $1,000. Updating your conversion value to $1,000 would help you better optimize your Google Ads bids and budget allocation to maximize long-term ROI.

Advanced Techniques for Refining Conversion Value Calculations

As you become more sophisticated with conversion value calculations, consider these advanced techniques:

• Predictive Analytics: Use machine learning models to predict future customer value based on behavioral and demographic attributes.
• Customer Segmentation: Segment customers into groups with similar value profiles and calculate conversion values per segment for more targeted optimization.
• Attribution Modeling: Use multi-touch attribution models to understand the contribution of each ad interaction to the final conversion value.

For instance, predictive analytics might reveal that customers acquired via certain keywords have a 30% higher CLV. You could increase bids and budget for those keywords accordingly. Customer segmentation could show that repeat customers have double the AOV of new customers, allowing you to adjust conversion values for remarketing campaigns.

The Importance of Continual Improvement

Markets, customer behaviors, and your own business strategies are constantly evolving. It's crucial to regularly review and update your conversion value calculations to stay aligned with these changes. Some tips:

• Analyze conversion value data at least quarterly and make adjustments as needed.
• Stay attuned to major changes in your market or business that could impact customer value.
• Continually test and experiment with different calculation methods to find what works best for your unique situation.
• Invest in analytics and data science resources to take your conversion value calculations to the next level.