What is the Cost-Revenue Ratio (CRR)?
The name makes it quite clear, yet you should look at the CRR in detail, as it is a good management tool in online marketing. Online shops in particular are often managed according to the cost-revenue ratio. This can certainly be sensible.
How is the Cost-Revenue Ratio calculated in online marketing?
The CRR can be illustrated very clearly using the online marketing channel SEA as an example. In contrast to the ‘Cost per Order‘ (CPO), where only the media budget from SEA is compared to the number of purchases, the CRR also includes the agency fee. The formula for the CRR is as follows:
Costs / Revenue = CRR
An example of calculating the CRR:
An online shop runs 100 ads with an average cost per click (CPC) of €1.50. The conversion rate for the campaign is 5%. The average shopping basket is €50. This means that 100 people click on each ad and 5 make a purchase.
Let’s calculate this:
- 100 (clicks) * €1.50 = €150 (click costs per ad)
- €150 (click costs) / 5 (buyers) = €30 (CPO)
- 5 (purchases) * €50 (shopping basket) = €250 (gross revenue)
- With 100 ads, this results in
- €25,000 gross revenue
- €15,000 click costs
In our example, we calculate 15,000 / 25,000 = 60%. This would be quite high, but unfortunately, we are missing the agency costs. Let us assume that the agency requires two person-days per month for the 100 ads. This results in costs amounting to €2,000. This gives us the following new value:
17,000 / 25,000 = 68%
This means the SEA channel has a CRR of 68%. Based on our experience, this would be extreme, or rather far too high, as there is hardly anything left for the online shop. The remaining €8,000 is not the profit – for simplicity’s sake, this was just a calculation example. In most cases, you first calculate a cross-channel CRR for a shop. This is usually significantly lower because channels such as search engine optimisation and email marketing have a low CRR. If you consider that direct visits, meaning people who enter the shop URL directly into the browser address bar, cost nothing, the mixed calculation will also produce a manageable value.
Cost-Revenue Ratio (CRR) Calculator
Here you can easily calculate the cost-revenue ratio. For this, enter the incurred click costs under “Costs” and the revenue generated under “Revenue”. The CRR will be calculated automatically.
What is an optimal cost-revenue ratio?
It is – as with all online marketing metrics – not possible to give a blanket answer. Here too, the range from 0 to 100 applies. Nevertheless, the question is absolutely valid, and therefore, a few aspects will be highlighted below to make classification easier. Firstly, it has already been mentioned in the previous section that the value should be assessed once per online marketing channel and then also across all channels.
So, determine your average margin and try to plan a manageable portion as your marketing budget. Let us assume your shop has an overall margin of 50%; then, depending on the circumstances, a CRR (i.e. a marketing share) of 15 to 25 per cent would be sustainable. However, the margin is not always the same. Accordingly, you can also calculate the CRR per product range and thus align your online marketing activities with each product line. IT products (hardware) usually have a lower margin than leather goods, and package holidays to the Mediterranean have different margins compared to individual trips within the DACH region. It can be quite sensible, for example, to scale back channels with a high CRR in one product range while ramping them up in other areas.
It should also have become clear in the previous section that you can optimise the mixed calculation through channel expansion or restructuring. For example, since affiliate marketing has no click costs, but is usually a fixed percentage of the basket value, this channel can be attractive for some product ranges where the margin is lower. In affiliate marketing, you can also set different commission rates for different product ranges. This is quite interesting from the CRR perspective.
SEO is also a channel that of course never runs for free, but usually generates extremely low CRR values after an initial setup period. SEA, on the other hand, can be noticeably adjusted with brand bids. Ultimately, however, you must decide for yourself which cost-revenue ratio you find acceptable and which fits into your calculations. Here too, you cannot expect a golden rule set in stone.
What can be considered certain is that a CRR must be continually optimised in ongoing business – and your agency or your team should always keep this in mind. We at Rheinwunder are happy to assist you! You can find Rheinwunder’s full range of services on our services page.
Do you want to improve your cost-revenue ratio in e-commerce and need support? Contact us! If you want to learn more or have your team trained on this topic, then take a look at our analytics seminars.
