Formulas and Ratios to Judge Profitability and Potential

by Dr. Ralph F. Wilson, Editor Web Marketing Today Premium, Fall 2005, Issue 94.

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What do ratios and indexes really tell you about. What are the weakness and fallacies? This brief chapter discusses the R/S ration, the KEI (Keyword Effectiveness Index), the PPCEI, and various profitability ratios available with different research software programs. It also discusses the value of bid prices and number of advertisers in assessing competition and potential.

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Research programs designed to look for niches (or potentially profitable niche keywords) use various formulas and ratios to help you spot "hot" keywords easily. The most common are R/S Ratio and KEI, designed to highlight promising keywords that are often searched for (high demand), but that don't appear on many websites (low supply or competition).

R/S Ratio

The R/S Ratio simply divides demand by supply to help pinpoint potentially profitable keywords. The ratio of searches to competing sites helps you quickly spot keywords with greater than average potential. R = requests, the number of searches on that keyword in a given time period and S = Supply, the number of websites resulting from a search engine search on that keyword.

R/S Ratio = R / S

(Note, some software and articles seem to reverse R and S, by having the letters stand for different, albeit more intuitive, things: R = results from a search of websites with the keyword and S = searches; or P = popularity measured by number of searches and C = competitiveness measured by the number of webpages. Don't let yourself be confused).

While R/S ratio is useful, KEI is a better indicator of keyword profit potential for reasons I'll explain in a moment.

KEI

The KEI (Keyword Effectiveness Index) was developed by Sumantra Roy, a highly respected search engine positioning specialist who publishes 1st Search Ranking Newsletter. The KEI formula Wordtracker uses is:

KEI =	number of searches (squared) _______________________
	number of competing sites

 OR

KEI = R²/S

(For more on the formula, see a Wordtracker help screen, www.wordtracker.com/help/keihelp.html). Sumantra Roy modifies this formula slightly by multiplying the result by 1000 to get rid of decimal points, KEI = (R²/S)*1000. Either way KEI works nicely to compare keyword potential.

The difference between the two is that the R/S ratio doesn't square the number of competing websites. Squaring the popularity has the effect of accentuating the difference between popular and less popular keywords. Without squaring popularity, keywords without very many searches could have as high a ratio as keywords with a lot of searches.

Consider this example from a help screen in TheDowser Keyword Research Software:

Keyword	Requests	Supply	KEI	R/S Ratio
yahoo web hosting	12,721	90,000	1798	7.07
msn web hosting	1,482	9,720	226	6.56

The R/S ratios would indicate that both "yahoo web hosting" and "msn web hosting" have similar potential. But the KEI points out that "yahoo web hosting" is much more attractive than "msn web hosting" because of the volume of searches for it.

Both KEI and the R/S ratio compare the count result (the number of times a keyword has been searched for) with the number of competing webpages. The larger the KEI, the greater the popularity of a search term compared to the number of webpages that use this keyword. If you sort a list of keywords by KEI, you can quickly spot the less competitive keywords. But KEI doesn't tell the whole story, so use it with discretion.

Number of PPC Campaigns

The problem with both R/S and KEI is that a gross Google search on a keyword may produce lots of webpages but does not really distinguish how many are actual competitors. A much better indicator of competition for a keyword is the number of PPC campaigns running on that keyword. The greater the number of campaigns, the more the competition. Several of the research software packages calculate this for you.

Bid Prices

Neither R/S or KEI tell you how expensive the keyword is on PPC search engines -- though a high KEI is a clue to less competitive (and thus less bid upon) keywords. Nor does KEI tell you if a product is profitable. It's also possible for a product keyword to have a high KEI, but still not have enough demand to sell very much. So use KEI as one indicator, but use it with discretion.

Another way to determine competitiveness is by bid price. Generally, bid price is related to the number of competitors bidding for a keyword and the average profit margin on products sold via this keyword. When a bid price gets too close to the profit margin, wise bidders back off.

Some of the better PPC oriented research software programs include bid price, number of PPC campaigns, or both. It's difficult to put this information into a formula, perhaps, but PPC bid price has a lot to do with profitability, whether you are monetizing as an affiliate microsite, a Google AdWords content site, or an e-commerce site.

PPCEI (Pay Per Click Effectiveness Index)

In addition to the KEI, P.I.P.E. Product Idea Profitability Evaluator adds a proprietary index calculated for each keyword that it calls the PPCEI (Pay Per Click Effectiveness Index). It builds into the formula the average advertising cost of the keyword, though the formula that is not disclosed. The program developer explains, "The calculation also factors in high cost words and weights them down in comparison to lower cost per click but high demand words. Also, the calculation is always performed in real-time using special backend feeds to several Pay Per Click search engines."

A number of PPC-oriented research tools display both KEI and bid prices for each keyword, but only P.I.P.E. (that I know of) combines all this information into an index that allows you to sort keywords by greatest potential.

Profitability Ratio

Both P.I.P.E. and Market Research Wizard use a group of keywords, rather than just single keywords taken separately, to help get a handle on profitability. Thus you can see a panoramic view, rather than try to judge from a group of snapshots (individual ratios for each keyword).

P.I.P.E. offers an Overall Profit Potential (OPP) score. The issue here is the overall cost of keyword advertising vs. the likely sales price of the product. P.I.P.E. doesn't disclose the exact algorithm it uses to calculate the OPP.

WorldWide Brands' Market Research Wizard works differently from most other systems, since it focuses on tangible products for sale as its sole monetization approach. It provides a keyword generation tool, which shows searches, but doesn't use KEI. Since it is product oriented, it studies competition through a search of Yahoo! Shopping as well as eBay, but it shows Google search results as well. Once data is compiled for various groups of keywords, an analysis section shows a percentage estimate indicating the chance of successful sales on the Internet, with a green bar that helps interpret what the percentage estimate means.

While some other vendors use the term "profitability ratio" or something similar, these seem to be terms to describe the R/S ratio or KEI, and have nothing to do directly with profit on the sales of products. Rather, they describe "profitability potential" for keyword groups based on supply and demand.