Online marketers have been quick to embrace the tantalising potential of pay-per-click advertising, but many have failed to realise the exciting efficiencies the model offers.

Pay-per-click advertising is an extremely alluring idea. The concept is simple: you only pay when a prospect directly 'interacts' with your advert (by clicking on it), rather than on the off-chance that they might have glanced at it. In theory, this should mean that the more you pay, the more you get back, but is this actually the case?

The model certainly makes it an incredibly exciting and cost-effective tool for marketers engaged in customer acquisition drives and the vast numbers of potential customers now online is well documented. In fact, the major players in the pay-per-click market are almost too good at providing a steady stream of visitors to websites that participate in their programmes. Suddenly your site is enjoying an uptick in traffic -- and a hefty click bill along with it -- but are you getting real value?

In reality, pay-per-click advertising is only half of a solution. Converting the prospects visiting your site into customers is the other, equally important, half of the solution. The clicks themselves are great, but how many of them are resulting in sales?

Unless you optimise your conversion ratios at the same time, your pay-per-click campaign is unlikely to be any more effective than traditionally 'passive' and unquantifiable offline methods. To borrow the old retail adage: you've got the legs into the store, now turn them into customers.

The real challenge for marketers embarking on pay-per-click campaigns is to acquire at least a basic knowledge of conversion optimisation -- a collection of techniques designed to increase site conversion rates -- and implement these simultaneously.

Working out your conversion ratio
To work out what your conversation ratio is, let's look at some numbers. If an investment of £1,000 in pay-per-click advertising generates 100 clicks, it's easy to calculate a cost of £10-per-click.

The next step is to look at how many clicks, on average, it takes to achieve a 'conversion' (the converting of a prospect into a customer). Obviously, what constitutes a successful 'conversion' differs widely between companies and across industries, but, for our purposes here, a generic example based on several simplifying assumptions is adequate.

Example conversion ratio calculation
Let's assume that a B2B company considers a web lead to be their ideal form of conversion. It is also reasonable to assume that not every web lead will result in a new business win. Therefore, the formula is as follows:

Conversion Ratio = C x L x Q / C

C = Number of clicks
L = Percentage of clicks converted to web leads
Q = Percentage of web leads that are qualified

Simply allocate a number to each of the values above, multiply them together and divide by the number of clicks received to get an accurate conversion ratio.

This basic equation not only enables you to work out the expected Return On Investment (ROI), it also shows that the number of clicks being received effectively cancels itself out and has no direct bearing on the conversion ratio. In other words, that it doesn't matter how many clicks are received, the ratio will remain the same.

Placing figures in the original example shows how this works:

Conversion Ratio = 100 x 0.1 x 0.3 / 100

C = 100
L = 10 % (assuming 10 per cent of all clicks lead to a web lead)
Q = 30 % (assuming 30 per cent of all web leads are qualified)

In this example, the conversion ratio is three out of 100 or 3 per cent and the number of clicks (100) cancels itself out.

This is important because it demonstrates that simply increasing the number of clicks (C) is the least efficient way of generating conversions, as well as being potentially quite expensive. So what are the alternatives?

Next week: John examines some of the innovative strategies at your disposal.

John Ginsberg is product & marketing director, Ensight.