Clicks, conversions, and Christmas

Online advertisers have noticed that CPCs tend to increase during the holiday season and have asked us why. We turned to Hal Varian, Google’s Chief Economist, for an explanation:

Many advertisers track their average cost-per-click (CPC), but what really matters for the bottom line is the average cost-per-acquisition (CPA): how much you have to spend on advertising to make a sale. The third factor to watch is the conversion rate, which is defined as conversions (sales) per click.

Note that these numbers are neatly tied together by the convenient formula:

CPA = CPC/Conversion rate = (cost/click)/(conversions/click).

Clicks, cost, and conversions all go up during the holidays. As it happens, conversions increase more than clicks, so conversion rates tend to rise. This makes the clicks more valuable, so advertisers raise their bids to reach more consumers. As a result CPCs get pushed up.

(Click image for full-size version)

The plot above shows the median CPC, the median conversion rate, and the median CPA during the 2006 holiday season for those Google AdWords advertisers who use conversion tracking. The series have been normalized so they all start at the same point on November 1.

Last year, Thanksgiving fell on November 23. Note how the conversion rate (green) and the CPC (blue) both dropped on that day which means CPA (red) went up. Perhaps watching football and eating turkey trumped online shopping on Thanksgiving?

Right after Turkey Day, people started on their Christmas shopping so conversion rates started to rise. During this period, advertisers raised their bids in order to get more prominent positions in the ad auctions so they could attract those shoppers. That increased the median CPC (blue). But the conversion rate rose more than the CPC, which pushed CPA (red) down. Even though the clicks cost more, the conversions -- what really matter -- cost less.

The conversion rate peaked on December 11, somewhat before the peak of overall retail sales, since it takes time to process and ship the online orders. By December 23, things were pretty much back to normal. Once Christmas Day arrived, conversion rates dropped to their lowest point of the year -- people were just too busy opening presents to think about buying more things… at least for the next few days.

The bottom line is that is that the cost of clicks does tend to rise during the holidays. But since those clicks are more likely to turn into sales, the CPA goes down, making those seemingly expensive clicks quite a bargain. If you are interested in tracking how your own conversion rates and CPAs change during the holiday season, you can set up AdWords Conversion Tracking on your ads and see how these metrics work for you.

Thanks to Hal for his explanation on how the holiday season can affect the ROI for an AdWords campaign. And remember, you can always visit the AdWords Help Center year-round to read up on tips on how to improve your ad performance.

Posted by Christina, Inside AdWords crew