Part 2 - Understanding EPC

Part 2 - Understanding EPC

This is the second article in the series that unpacks Earnings Per Click (EPC). Click here if you wish to reach Part 1. The previous article covered the basics in how EPC is calculated while this one goes in depth into what actually lays at the heart of EPC.

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So now we have an approximation for the EPC and the formula will look like.

EPC = (Total Revenue Over a Period of Time)  /  (No. Clicks x Parking Company Filter)

Escrow.com

This is great but we have forgotten the other side of the whole equation. An Earnings Per Click for the domain owner is a Cost Per Click (CPC) for the advertiser. How much they will pay for each click will be dependent upon their business models and ultimately conversion rates.

If I’m an advertiser and I need 10 clicks at $1 each to make a sale and I make $20 for every sale, then I’m happily making money. But if the online auction for the traffic increases to $2 per click then my advertising is costing $20 and I’m making $0.

In a perfect world where everyone has the identical conversion rate, the advertiser with the lowest cost base will ultimately be able to outbid their competitors. It just so happens that we don’t live in a perfect world and many advertisers have widely varying margins that they can expend upon buying traffic.

Assuming economically rational advertisers (they aren’t always) we can then simplify what an advertiser is willing to pay for a click down to the following equation:

p=  Am  S  C

Where:

p= maximum price per click

Am = Advertiser gross margin on the goods/service being sold

S = total value of the sale

C = Conversion rate (0 to 100%)

What this formula suggests is that in market verticals with large margins the EPC should trend higher. We see this as domain investors know the “Sale Value” of a mortgage lead is much higher than a computer games lead, so the EPC for mortgage traffic is much more valuable. Remember we are talking about EPC rates and not revenue at this stage…..revenue will also depend upon the click through rate.

By adding the conversion rate into the equation, we can clearly see why Google wants conversions to be as high as possible. The higher the conversion rate, the higher an advertiser can bid for traffic. I read in a forum recently that Google doesn’t care about the conversion rate…..this formula debunks that theory and provides an economic rational why Google wants higher conversions.

Ideally for a domain investor we want high traffic domains in market verticals that have big margins and large sale prices. Sadly, these are few and far between…

So we now know what an advertiser is willing to pay for a click but what’s our percentage? If we were to simplify the whole advertising auction system, then the formula for revenue now looks like the scary one below.

EPC forumla

Where:

p= Price advertisers pay per click
f(p)= p x Advertising clicks
G= Google margin
Mg = Additional Google tier margin
T = Tag smart pricing
M= Monetisation company margin

What does this complicated equation actually mean? Once you get past the sigma notation (ie. Sum) you have a function which is essentially what an advertiser pays for a click multiplied by the number of clicks.

The (1 – G) is the Google margin and the “T” is some “smart pricing” factor that is applied to the tag that your particular account at a parking provider happens to be on. The (1 + Mg) is the increase in margin due to the Google tiers that a particular parking company may be on….this typically has a very small impact on the results. The (1 – M) is the margin taken by the parking provider. This will then become the numerator for the EPC equation.

The sigma or sum just means sum all of the revenue earned for all of the values of "p" for the function f(p). In other words, just add up all of the revenue. So let's move on.....

The denominator (ie. Number of clicks) is different to the advertising clicks. This is where it can get a little tricky. An advertiser may still pay for a click but it is still not registered as a click in a parking company interface due to their filters. By rights, the revenue should still flow through (fingers crossed) but the clicks may not.

The question domain investors should ask is what can they influence in the equation? Assuming Google has the targeting right (they don’t always) then there isn’t that much at a single parking provider. If you’re big enough you can squeeze parking company margins but other than that an individual domain owner typically neither has the scale nor the technology to take advantage of other optimisation solutions. Don’t worry…..there is light at the end of the tunnel.

A few things should be said…..given the volatility of the domain parking market the parking companies do not have any spare margin to hand around to domain owners. In other words, there isn’t some secret slush fund that any of them have. If this were the case, then it would come out and as soon as they paid out with the slush fund it would be soaked up as domain owners migrate their traffic across to them. It’s the market at work….

On a personal note, as one of the founders of ParkLogic I've found that getting underneath the mathematics really provides dividends for clients. Understanding the maths and coming to grips with the fact that its constantly changing ís one of the reasons why large domain investors utilise our service.

In the next article I will go through the opportunities and pitfalls that understanding EPC presents for domain investors.

Greenberg and Lieberman

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Part 9 - Portfolio Management - EPC/CTR May Not Be What You Thought

Part 9 - Portfolio Management - EPC/CTR May Not Be What You Thought

I’ve been asked a lot of questions by readers on the topic of traffic optimisation and I thought that it would be worthwhile diving a little deeper into some of the metrics that underpin all our traffic monetisation earnings.

To fully understand click through rate (CTR) we need to take a look at the formula.

CTR = (total number of clicks) / (total views) x 100%

Both of the measurements used in the CTR formula are subject to various levels of filtering. For example, is the “total number of clicks” the actual number of clicks on advertisements or the number of clicks on advertisements within a specified time frame? Or is it actually the number of clicks within a specified time frame for a particular IP address? Or is it the number of clicks within a specified time frame for an IP Address/Cookie combination?

Different companies will count clicks differently and there isn’t really much we can do about this. I have unpacked views in previous articles but it basically boils down to:

Views = (Raw Traffic) x Factor

The factor is a wide range of filters that are applied to the raw traffic by monetisation sources to strip out everything except traffic that is actually monetisable. Since there is no industry standard definition for views this metric will vary greatly from one parking company to another. This does not mean that any of the parking companies are behaving in a fraudulent manner but it does mean they count things differently.

So given the fact that both metrics used in calculating the CTR are completely subjective is there any point in looking at the CTR? Let me say that comparing the CTR between companies is a lesson in futility but comparing the CTR over time for a domain within a single company is actually worthwhile.

The CTR is actually a measurement of user intent. If a domain has a low CTR then it invariably means the parked page has little relevance to the desires of the traffic visiting it. So from an optimisation perspective we want to match the traffic to the page results as accurately as possible. In many respects Google gets this pretty right but there are always cases where Google gets it completely wrong and keyword optimisation comes into play.

With the introduction of CAF (Custom Ad Frame) by Google a number of years ago it essentially means that Google now serves the parked pages. You only need to do a “view source” to see that this is the case. What Google did was mimic the various parking provider’s templates and then they serve the pages themselves. The CAF strategy was driven by Google trying to stamp out fraudulent traffic – and they largely succeeded.

What this also means that when you set a keyword Google largely views it as a serving suggestion. Setting a keyword does not guarantee that Google will use that particular keyword for your domain.

Many years ago some domainers quickly realised that by setting mortgage keywords for all of their domains they would get awesome earnings per click but really low CTR. The huge EPC rates more than offset the decline in CTR. This is one of the reasons why Google doesn’t completely allow you to set keywords anymore…..they want to provide a better user experience (ie. CTR).

Earnings per click (EPC) is exactly what is says, how much money do you make for each click.

EPC = (Total Revenue) / (Total Views)

This formula seems pretty obvious until you begin to dig into “Total Revenue”. The total revenue for a domain is influenced by many different factors, including:

  • Google tags at the parking level to encourage parking companies to maintain quality
  • Sub-tags where a group of accounts at a parking company will be evaluated on their quality
  • DRID (Domain Registrant ID introduced by Google at CAF time) – are you a good player or not?
  • Clawbacks (often known as advertising credits)
  • Account adjustments

A lot of these different metrics are wrapped up in the phrase “smart pricing”. In other words, has your domain/account been smart-priced up or down? This will all contribute to influencing the EPC.

But at its core, what is EPC? EPC is the measurement of advertiser demand on the Google advertising exchange. It’s a position on the supply/demand curve where if there is less supply the EPC goes up or if there is less demand for the same volume of traffic the EPC rate goes down.

If you ever see an EPC rate that suddenly jumps up, then it’s typically the result of a marketing manager putting the decimal point in the incorrect spot for a bid. Don’t get too excited, just enjoy the increase and expect it to fall off as their budget is quickly consumed…..with any luck you won’t get a clawback!

What we should also appreciate is that advertisements higher on a parked page get paid more than those lower down the page. The spread in EPC rates down the page will really depend upon the number of advertisers bidding for the traffic (think of it like market depth with shares).

Don’t forget that EPC is implicitly a measurement across a period of time. When you look at your parking company stats the lowest level of data you can view is the EPC rate for a day. I’ve said this before but it’s important to recap…..what you are viewing is an average EPC rate. This is vital in understanding how to optimise domain traffic.

So ultimately what domain investors want is a high CTR (user intent) and a high EPC (advertiser demand). The best way to achieve this is to examine the data, "suggest keywords" and then revisit the changes you've made......which is a LOT of work.

In my time as the vice-chairman of the Internet Industry Association of Australia I had the privilege of chairing the committee for setting the online advertising standards for our nation. There is one thing that I learned from that experience, fully understanding the definitions driving the metrics is mandatory if you wish to grow your online advertising based business.

Anyone that earns money from monetising their domain traffic should spend a considerable amount of their time not just looking at their numbers but interpreting what they mean. The only way you can do this is to understand the definitions. I hope this article has helped you out on your journey…..BTW, definitions can also change over time….so beware!

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