How To Calculate If Your Campaigns Will Make Money (33)
CTR! CVR! CPM! CPC! CPA! EPC!
WTF?
Affiliate marketing is a game of thrones - you win or you die.
No, wait, that's wrong. Thankfully.
Affiliate marketing is a game of numbers. If the numbers don't work, you don't make money.
Most of us understand what each of the individual metrics for affiliate marketing mean: CTR means Clickthrough Rate, CVR means Conversion Rate, and so on.
But the hidden stumbling block can be putting them all together.
That's what this article is here to do - give you clear-cut relationships between common metrics that you can use in spreadsheets to understand what it will take to make your campaign profitable.
Note: this article just focuses on ads, offers and financials. I'll look at landing pages and how they factor in in a follow-up article.
Ad Math
Most traffic sources will either charge in CPC or CPM. You wouldn't bother recalcuating those, but it can be useful to be able to calculate your CPC from a CPM traffic source, or your CPM from a CPC traffic source.
CPM (Cost Per Mille) is the cost to display an ad 1,000 times to website visitors.
CPM = CPC x CTR x 10
If your CPC is $0.50 and your CTR is 1%, your CPM =
= $0.5 x 1 x 10
= $5
CPC (Cost Per Click) is the cost to get a single visitor to click on an ad.
CPC = CPM / ( CTR *10 )
If your CPM is $5 and your CTR is 1%, your CPC =
= $5 / (1*10)
= $5 / 10
= $0.50.
CTR (Clickthrough Rate) is the number of website visitors who click on an ad, expressed as a percentage.
CTR = 100 x number of clicks / number of views.
If you had 10 clicks and 10,000 views, your CTR
= 100 x10 /10,000
= 1000 / 10,000
= 0.1%
CTR = CPM / ( CPC*10 )
If your CPM is $5 and your CPC is $0.5, your CTR
= $5 / ($.5 x 10)
= $5 / $5
= 1%
Offer Math
CVR (Conversion Rate) is the percentage of people who clicked onto the offer who subsequently convert (take an action, like downloading an app)
CVR = (Number of conversions / number of visitors) x 100.
If you had 5 conversions and 100 visitors, your CVR
= (5/100) x 100
= 0.05 x 100
= 5%.
EPC (Earnings Per Click) is the amount you earn per click on an ad.
EPC = Payout x CVR / 100
If your payout is $2 and your CVR is 5%, your EPC
= $2 x $5 /100
= $10 / 100
= $0.10
CPA (Cost Per Action) is the amount that it costs to get a user to perform an action, such as download.
CPA = CPC x 100 / CVR
If your CPC is $0.20 and your CVR is 5%, your CPA
= $0.20 x 100 / 5
= $20 / 5
= $4
eCPM (Effective Cost Per Mille) is the amount you earn per thousand views of an ad.
eCPM = CTR x CVR x payout / 10
If your CTR is 1%, your CVR is 5%, and your payout is $2, your eCPM is
= 1 x 5 x $2 /10
= $10 / 10
= $1
Profitability Math
Profit / Loss is the amount of money you make from a given ad or campaign. If positive, it's called "profit", if negative, it's called "loss".
This is the most important metric in this entire article!
Profit = ( EPC - CPC ) x total spend on ads / CPC
If you spend $100 on a campaign whose EPC is $0.10 and whose CPC is $0.20, your profit/loss
= ( $0.10 - $0.20 ) x $100 / $0.20
= -$0.10 x $100 / $0.20
= -$10 / $0.20
= -$50
In other words, you will lose $50.
Profit = (eCPM - CPM) x total spend on ads / CPM.
If you spend $100 on a campaign whose eCPM is $10 and whose CPM is $5, your profit will be
= ( $10 - $5 ) x $100 / $5
= $5 x $100 / $5
= $100 .
In other words, you will make $100.
Profit = (payout - CPA) x total spend on ads / CPA.
If you spend $100 on a campaign whose payout is $2 and whose CPA is $1, your profit will be
= ( $2 - $1 ) x $100 / $1
= $1 x $100 / $1
= $100 .
In other words, you will make $100.
Profit = ROI x Spend /100
If you have a campaign which has 300% ROI but a maximum spend of $5 a day, you will make
= 300 x 5 /100
= $15
a day from it.
ROI (Return On Investment) is the percentage of your initial spend you expect to see as profit.
Important: high ROI is not valuable on its own. Only if high ROI can be paired with enough spend to create a good profit is it valuable.
ROI = ( EPC - CPC ) x 100 / CPC
If your EPC is $0.10 and your CPC is $0.20, your ROI
= ($0.10 - $0.20) x 100 / $0.20
= -10 / 0.2
= -50%.
In other words, you will lose half the money you invest in this campaign.
ROI = (eCPM - CPM) x 100 / CPM.
If your eCPM is $10 and your CPM is $5, your ROI
= (10-5) x 100 / 5
= 500 / 5
= 100%.
In other words, you will make as much money again as you put into this campaign.
ROI = (payout - CPA) x 100 / CPA.
If your payout is $2 and your CPA is $1, your ROI
= (2-1)x100/1
= 1x100
= 100%
In other words, you will make as much money again as you put into this campaign.
Hope that makes things clearer! If you have any questions, suggestions or comments, please do post 'em below!
I did a step by step series about this back in April 2013 if you'd like more here's the link http://www.oooff.com/php-affiliate-s...ore-of-it-all/
Awesome!
This should be required reading before anyone spends any money on any paid marketing activity.
@caurmen, your last two equations should actually be ROI and not profit.
Originally Posted by cmdeal
Originally Posted by cmdeal
Thank you for laying this out for us. This is something I really need...but I'm pretty darn slow, so it'll still take me a few times for me to wrap my head around all of these formulas, so that I can almost do them in my head. A very simple web-based or Adobe Air app would be awesome for quickly calculating these numbers and percentages.
These are definitely metrics and formulas that you should internalise as quickly as possible. IM is a data and numbers driven game, and you need to be able to quickly identify issues and opportunities that are hidden in your data.
Caurmen, thanks a ton for sharing this! It has been printed and taped to my wall right over my monitor for immediate reference.
Hi there I cant find where your step by step series is.. Please can you direct me? Thanks.
@sharif - http://stmforum.com/forum/showthread...TION-AND-INDEX is what you're looking for, I think.
wow this is sooo important to know ! I will be bookmarking this and referencing it constantly.
Thank you for doing all the math for me 
Nice. When researching offers we don't know much more then estimated CPC and payout $
So we need to:
1) calculate how many clicks we can afford before we start losing $ = payout / cpc [eg. $10/$1 = 10 clicks]
so we now know that we can afford 10 clicks until we start losing $
2) once we know that we want to calculate what our conversion% has to be in order to breakeven = (conversions / number of clicks) x 100 [eg. (1 / 10) x 100 = 10%]
so we now know that at a payout of $10 and cpc of $1 our conversion% has to be 10% in order to breakeven.
but yea obviously we can get a real understanding only after we buy ads and get real data to know what the real CPC and conversion% was.
Great post! Thank you so much for everything. I'm not so good in math but I'm going to improve myself, promised
Originally Posted by 2imelite
Originally Posted by Smaxor
CPM cost / ( CTR (decimal) * 1000 ) < Conversion Rate * CPA
Profitable? Yes/No
$2 / (0.2% * 1000) < 20% * $10 $1.00 < $2.00, Yes
$1.20 / (0.45% * 1000) < 4% * $5 $0.26 < $0.20, No
$3.40 / (0.11% * 1000) < 32% * $47 $3.09 < $15.04, No
$1.33 / (0.05% * 1000) < 5% * $12 $0.67 < $0.60, No
$5.80 / (2.3% * 1000) < 2% * $38 $0.25 < $0.76, No
Thanks for sharing this. Bookmarking and will refer to it when needed.
This article is a huge contribution, especially for all new starters and even for medium & experienced affiliates - its very important to be good at basic maths, and to be able to calculate stuff in a fast manner.
Sometimes you are on the phone with a client and you need to come up with a (ballpark) number immediately, or you have thousands of campaigns (like in our case, being a network) you need to run through on a daily basis to decide which ones to Push, Cut or Maintain.
What is known as payout?
@affiliatelk - "Payout" is the amount you get paid per lead or per sale. Your network should list this for every offer you're running.
@caurmen another amazing post. I bookmarked this page. I believe this will help me with my fear of losing money. This should be the foundation for any marketer who does ad spend to market, advertise or promote. I NEVER knew you could get this much data out of the #'s. When I joined the first day I was like hell this place is overwhelming and will probably have tons of useless threads, lol boy was I wrong.
My goal is to study this list and learn these formulas like I have learned the procedures at my 9-5. I know understanding these formulas with ability to assess campaigns is a great foundation. So by 01.01.16 I really plan to know these like the back of my hand 
This place continues to amaze me....
Thanks,
ChanLow
@chanlow - glad it was useful!
Great post! Thread bookmarked and required reading for all!
Most of the time when an affiliate manager send me an offer list it contains only the Payout and EPC. Can i use these variables to determine which offer to run? or do i need more information?
Can somebody explain to how to use this when doing an offer selection?
@whtang - EPC is close to useless as you don't know the variables that go into it. Payout is valuable only in that it lets you calculate your likely needed testing budget.
Ideally, you want to know which offers have the highest volume of conversions on your specific traffic source type. Failing that, just knowing the highest-volume offers is a good way to pick some winners - people aren't going to spend big on an offer consistently unless it's converting.
But don't just choose an offer based on that. Look at the offer. Would you sign up for it? Would anyone you know sign up for it? Actually look at the offer lander, go through the signup process, check the conversion fires - does it still seem like a good offer? Is it compelling? Is the offer copy good? Can you think of angles for it? Does the payout seem to match with the amount of effort your prospects will have to go through to sign up?
If so, then test it, regardless of volume. There are plenty of unknown gems out there waiting for an affiliate to test them.
Amazing post! Thank for sharing. I'm a fan of Dr. Ngo and also follow his blog. He has an entry that includes 2 spreadsheet templates to record daily numbers/profits:
http://charlesngo.com/profittemplates/
If posting this link is not allowed for any reason, please delete.
Thanks again for this breakdown!
Perfectly allowed - that's a really useful link!
This is great ! Math is never wrong if you know how to apply it. I almost missed this post before I launched my first campaign and I think is a very important piece of my A.M foundation. Thank you Caurmen for this post and thank you all guys for being helpful and inspiring . Have a great day !
Setting up tracking and a reporting/profit calculation tool are basics 1.01 before launching any campaign indeed. You need data to make good and informed decisions.
@caurmen hi, where is the factor about landing page?
@stmgdepdfe - Landing pages modify your CTR through to the offer, as well as your CVR. A successful landing page will adjust your CVR up far enough to compensate for the loss in CTR through to the offer, and then even further into profit.
Here's an example:
You start off direct-linking to an offer. You're paying $1 per 1,000 views on your ad, and you have a CTR of 1%, meaning your CPC is $0.10. However, your CVR is only 1%, and your payout is $5, meaning your eCPM is $0.50.
Your eCPM is below your CPM, so you're losing money.
So you add in a landing page.
Half the visitors who click on the landing page go through to the offer (the landing page has a lander CTR of 50%). So your CTR to the offer effectively halves, meaning that your CPC to the offer is now $0.20. Bummer.
However, the conversion rate of visitors who have gone through this funnel shoots up - it's now 10%! (That's not unrealistic in some verticals.)
So now, you have an eCPM of $2.50. Your CPM is still $1, so now you're making $1.50 per thousand views in profit!
Does that make sense?
Fantastic post and also the link you shared!
Thank you for the post. Very helpful.
Home > Affiliate Marketing Forum >