When it comes to Pay Per Click Advertising and Google Adwords, many companies fail because they have not set out a solid bidding strategy or estimated a structured budget and bidding mechanism. Identifying scenarios such as when to bid, by how much and how to know when to either raise or lower the bid are common place. As a result many companies’s end up losing money and fail to maximise profit and generate a high Return on Investment. To help company’s establish a more successful budget & Google Adwords Bidding structure the following process should be incorporated.
- Determine Your Max Profitable Cost Per Acquisition
- Determine Your Conversion Rate
- Calculate Your Value Per Click
- Adjust Bids So Your Value Per Click =Incremental Cost Per Click (ICC)
Determine Your Maximum Profitable CPA:
Example – If your company sold cameras at a price of 300 dollars and the cost of producing them cost 200. Then for every camera you sell you will make an additional 100 dollars profit. This can be referred to as your Maximum Profitable Cost per Acquisition or Action. So for every conversion your company will acquire 100 dollars. This means you can pay up to 100 dollars for each conversion and still make a profit. On Google you bid by CPC not CPA. Therefore you have to convert your maximum CPA into maximum CPC bid.
Determine Your Conversion Rate:
Every company have specific Goals in mind and each ad or campaign has a specific goal. Goals can vary and can depend on your priorities, strategy, industry or requirements. Generally goals can include a sale, a purchase, a sign-up, a registration, a download, a lead etc. Every time a user completes one of these goals they have given you a conversion. You need to be able to contribute a value to each of these conversions. A Conversion Rate can refer to the Number of conversions divided by the number of clicks to your site. To determine your conversion rate you will have to complete this calculation and to access this data you can utilise tools such as Google Analytics. Once you have determined your Conversion Rate you will need to determine your Value per Click. So for instance if you had 100 clicks on your site and 5 conversions, then your conversion rate would be 5%.
Calculate Your Value Per Click:
The value per click can refer to as the value you can expect on average of each click to your site. This value can be calculated by multiplying your Max CPA by your Conversion Rate also referred to as the value per conversion times your average conversion rate. On average each visit to your site = this value. If you are to pay the value of this per click you could expect to break even on marketing investment.
The value per click is the expected profit from a current visitor but you may need to adjust your value to reflect the fact that a visitor may not make a purchase the 1st time round but at a later stage. By bidding on average at your value per click you can expect to make a profit or at least break even. Bidding at your value per click will lead to profitable results but may not result in your most profitable result. As seen in the table below, a bid of 4 dollars returns more profit than a bid of 5 dollars. The reason for this is because the incremental cost of clicks exceeded the incremental value. The additional cost of gaining a click exceeded the value of them. You can use bid simulator to see the estimated number of clicks and the cost levels associated with these values. You can calculate the cost of clicks at different values and the cost of those bids.
The Incremental Cost Per Click can be calculated by dividing the cost of incremental clicks by the number of incremental clicks.
Adjust Bids So Your Value Per Click =ICC
When it comes to your ICC and your Value Per Click the following rule of thumb applies;
An example of how to calculate your ICC can be seen below;
Each additional click from 4.50 to 5.00 bid costs 5.73 dollars on average. Repeat the process for all the bids in your spreadsheet.
Incremental cost is generally higher then maximum bid but you never pay higher than maximum bid. This happens because increasing the bid may help to get new clicks at a cost close to old bid but some old clicks may come at a cost as well. This maybe because your appearing in more expensive auctions etc.
It is important to perform these calculations and to monitor them on a regular basis. Doing so will result in greater ROI and performance. So next time your conducting your PPC campaign you should be looking to conduct these calculations accordingly.
If you incorporate a Google Adwords Bidding Strategy as described you will find that it could Save You Money.
Interesting article, thanks for these explanations.