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)

(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.

so,

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, etcÂ 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

Partner to Your Success,

-Socrates

** Related Posts**

on 01 Feb 2009 at 9:17 pmNext to choosing the right keywords, the bid amount is one of the biggest mysteries. Thanks for clearing that up. Using your formula, I can see PPC getting a boost in participation.

on 02 Feb 2009 at 6:58 amwhat’s a guy got to do to make some money on the internet without having to shell out any money?

on 02 Feb 2009 at 12:18 pmThis article puts in a nutshell valuable information. Will return to this information in the future as the need arises. Thank you for prividing this material.

on 02 Feb 2009 at 2:04 pmgreat article and really points out the science and math to PPC. Once you’ve got this dialed in and your QS goes up even bigger profits.

on 06 Feb 2009 at 3:09 pmthanks for the download material can i really do want with it? do i promote your site for you? thankyou again

on 07 Feb 2009 at 3:35 pminteresting formula… well done my philosophical friend !!

on 09 Feb 2009 at 2:13 amTop tip there Socrates, nice one!

Dave.

on 12 Feb 2009 at 7:11 pmThat’s probably the clearest explanation of this I’ve seen.

And it perfectly illustrates why the Conversion Rate (largely influenced by the copy) is such a critical factor to success.

Joshua Aaron Stanley

Internet Sales Copywriter

on 10 Mar 2009 at 5:35 pmHi Socrates,

All due respect, there is on point that your are missing in that calculation which is Cost of Good Sold (COGS). In your first calculation if your conversion rate is 1% and sell the product for $50 and even products cost is $1, you are losing $1 in every sale if the cost of the product is $20 you lose $20… So you may add COGS to your equation in order to be more accurate.

(SP-Pr-COGS) * CR

Erdal

http://twitter.com/erdbez