Making Sense of CPCs and Holiday Trends

A few weeks ago, Hal Varian, Google's Chief Economist, had a post on "Clicks, Christmas and Conversions". In the post, Hal talks about the importance of understanding the inter-play between CPCs (Cost-per-click), conversion rates (CR) and CPAs (Cost-per-acquisition). Hal stresses that retailers need to focus on the CPA when evaluating the success of their online campaigns and not get hung up on rising CPCs during the holiday season, because they are only one factor in the equation of success. (Of course we could get into a much meatier conversation around ROI and how to accurately measure ROI of online campaigns which it is much more complicated than simply dividing the cost of online advertising/online sales. The true ROI model should include a metric for offline sales generated by online advertising among other metrics...but this is a discussion for a later date)

Therefore, the answer to why we shouldn't get hung up on rising CPCs during the holiday season is: although CPCs rise, conversions rise at a more rapid clip which in turn serves to depress CPAs. The upfront rise in CPCs during the October-November research period is offset by spiking conversions and the resultant plunge in CPAs in the December purchasing period. CPAs are the bottom line!

Taking another look at the graph above, which Hal provided, it is also interesting to note that the CPA does exactly what it should on Black Friday (and the following weekend) and dips down from where it was on Thanksgiving Day. According to Hitwise, Thanksgiving day sees record visits to retail websites (Hitwise Retail Index December 2007 reported that Thanksgiving was when the highest market share of US visits to the Hitwise Retail Index occurred; online traffic to retail websites increased 20% from 2006).

Traffic is high on Thanksgiving day (now often referred to as Brown Thursday) but it is not the peak day for conversions or purchases because consumers are in the research phase on Thanksgiving day, planning out their online purchases and in-store shopping trips for the next day, Black Friday. Black Friday is when retailers traditionally start offering large price discounts. Additionally, Cyber Monday (the Monday after Thanksgiving), known for its high online retail sales, sees a slight dip in CPA and then December 1 rings in the purchasing season. We also see the clear and expected conversion rate increase on Green Monday (Dec. 10, 2007/ second Monday in December) which has been noted as being the strongest online retail sales day. If the trend holds, the highest online retail sales day of 2008 will fall on December 8th.

Finally, in thinking about the 2008 winter holiday season, here's what we know:

1. Both research and shopping will start early this year: 31% of consumers plan to start holiday shopping and research before Halloween and a majority (57%) will start before Thanksgiving.¹ Therefore, the shopping has already begun...is your marketing strategy ensuring that your brand is top of mind throughout the entire research-purchase process and making it into the consideration set early on?
2. Consumers will spend more time looking for deals: 43% of consumers say they plan to spend more time this year shopping around for gifts because of the current state of the economy.¹ Consumers are taking the time to research the right purchase...Brands will need to focus on having a strong presence and clearly expressing their value proposition to guarantee inclusion in the consideration set.
3. There are 5 fewer shopping days this year, between Thanksgiving and Christmas, than last year: This is when the peak of conversions happen; therefore, retailers need to be wary of the tightened timeline and put strategies in place to lessen the crunch, by urging consumers to start purchasing before Thanksgiving!

1.OTX/ Google 2008 Holiday Shopping Intentions Survey, 9/16-9/24 2008, n=10,039

Posted by Emma Weisberg, Google Retail Team