I get this question frequently so I decided to write a blog post to explain how I calculate how much to bid on keywords on my Pay Per Click campaigns.

Let’s assume that you want to sell a product for $50.
We will also assume that since you are just starting a pay per click campaign, you have no conversion rate data so we will use 1% clicks to sale conversion as an average. In other words we assume you will make 1 sale for every 100 clicks.

Here is the calculation: (SP-Pr) * CR

In this example,
CR (conversion Rate) = 0.01
SP (product price) = $50.00
Pr (profit you want to make) = $0.00 (to break even)

(SP-Pr) * CR => (50-0) * 0.01 => 50*0.01 = $0.50

50 cents is the maximum you can afford to pay for each click in this situation
(note: the calculation in parentheses is done first)

Say you want to make $20 profit per sale with the above product.
The new equation becomes:

(SP-Pr) * CR => (50-20 ) * 0.01 => 30*0.01 = $0.30