The key to effective advertising on the Internet is to spend less on advertising than you will earn in profits from your website. Sounds simple but many companies miss this essential point. Determining your ROI (return on investment) is an essential part of any Internet advertising campaign. The first thing you should determine is what percentage of the visitors to your site make a purchase. This is also known as the Conversion Ratio:

(# of sales) / (# of clickthroughs) = Conversion Ratio (CR)

The next step is to determine how much each visitor to your site is worth based on what percentage of your visitors 'convert' into sales. This is known as the Value per Visitor.

(Conversion ratio) * (Value of each sale) = Value per Visitor (VPV)

Here's an example taken from the Blue Widget Company:

The Blue Widget Company gets 3000 visitors to their site each month and of those visitors 150 purchase a widget. Thus the conversion ratio is 150 divided by 3000 or 5%. In other words, five percent of the visitors to the website will purchase a widget. Suppose the widgets cost \$20.00 each. Thus the Value per Visitor will be 0.05 * \$20.00 = \$1.00. Each person who visits the site is worth one dollar in income for the company.

Why is this stuff important?
Why do we need to know how much each visitor to the site is worth? The reason for this is so we can determine how much you can afford to spend on advertising. If it costs \$1.25 to get each person to the site - but we only earn \$1.00 from that person then we will be out of business very soon. The trick is to keep our cost per click (or cost per visitor) LESS than our estimated value per visitor. The net profit will be determined by this formula:

VPV - CPC = Net Gain

You may wish to keep your cost per click below a certain amount - say 25% of your VPV. Then your net gain will be 75%. For every 25 cents you spend you will be earning \$1.00 for a profit of \$0.75. Understand? Good - let's move on to the next section: