A retailer ran display ads and wants to calculate the ROI on the display ads. The analyst
Question:
A retailer ran display ads and wants to calculate the ROI on the display ads. The analyst wants to account for purchases via both click-throughs and view-throughs. All calculations are done for two weeks.
The average click-through rate on a display ad is 0.12%, which we assume can be attributed entirely to the display ad. In terms of view-throughs, there are two effects. First, when a customer is exposed to a display impression, her probability of searching for a relevant company keyword on a search engine increases by 50%. The baseline (i.e., without seeing a display impression) probability of a customer to conduct a relevant search on a search engine is 0.6% in two weeks. Second, when a customer is exposed to a display impression, her probability of directly visiting the company’s website (i.e., by typing the company’s URL in the browser) increases by 20%. The baseline (i.e., without seeing a display impression) probability of a customer visiting the retailer’s website is 0.01% in two weeks. The click-through rate on a typical search ad is 3.5%, which we assume can be attributed entirely to the search ad.
The average CPM for display impressions is $2. A customer who arrives at the retailer’s website through a click on a display ad converts to purchase with an average rate of 10%, and the average margin on conversion is $15. A customer who arrives at the retailer’s website through a click on a search ad is further down in the “purchase funnel” (as compared to one arriving through a click on a display ad); such a customer has a higher average conversion rate of 20% and also purchases more so that the average margin on the conversion is $25. For search ads, payment is only for clicks, and the average cost per click (CPC) on search ads is $0.25. A customer who arrives at the retailer’s website by directly typing the website link in the URL is even further down in the “purchase funnel”; such a customer has an average conversion rate of 35%, and the average margin on the conversion is $30.
Find the ROI on display advertising accounting for both click-throughs and view-throughs.