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
This formula only accounts for one product. You should have more than just one product in your funnel. i usually aim to just break even or make a small profit on the first product sale and the upsells/future sales are pure profit.
If you are an affiliate where you only promote one product this calculation can be very powerful. Instead of the product price, make SP = your commission amount. (I generally dont promote affiliate products with less than $20 in NET commission)
Lets see some examples of this equation: (SP-Pr) * CR
If you sell a product for $27 and you convert at 2%. you want to make $10 profit per sale.
CR = 0.02
SP = $27
Pr = $10
(SP-Pr) * CR => (27-10) *0.02 => (17) * 0.02 = $0.34 Max CPC
If you sell a $4 product and you want to make $2 profit per sale, and your conversion is 3%
CR = 0.03
SP = 4
Pr = 2
(SP-Pr) * CR => (4-2) *0.03 => (2) * 0.03 = $0.06 Max CPC
In other more complex situations, when you have monthly continuity programs, back end sales, etc where the formula can become more complicated, here is what you do to easily calculate CPC.
First figure out how much you are willing to pay for each sale, then multiply it by the CR.
For example, if you are willing to pay up to $15 to generate a sale (lead), then do the following to find your Max CPC: (we assume 1% CR in this example)
$15 * 0.01 = $0.15 Max CPC
I hope this post helps you figure out your max CPC easier. Another factor when evaluating the viability of a product to be promoted on PPC is the competition. If you are trying to bid on real estate keywords that generally go for over $1 per click, but you can only afford to pay $0.20, then you should re-evaluate your product and strategy. (hint: Your competitors can teach you a lot. Check what your competition is doing and do the same)
Post your comments or questions below
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