How much should you bid on each ad group? Should you start with low bids and go high later, or vice versa? When should you change your bids? What’s more important: ad rank, CTR, click volume, or conversion rates? There aren’t easy answers for questions like these because, as in all marketing efforts, there are different valid strategies. Which ones are “best” depends on your company’s budget, timing, market position, and business objectives.
Determining optimal bidding strategy shouldn’t be viewed as a choice between the “right way” and the “wrong way.” The best bidding strategy is the one that’s most appropriate for your company’s situation (in other words, how much can you
afford to spend?) and your objectives, including brand awareness, revenue growth, or profitability.
The ultimate objective of most advertising campaigns, including PPC advertising, is to maximize conversions. And one of the main reasons that PPC advertising is so attractive and efficient is because measuring conversions and ROI is easy. In order to serve larger marketing and company goals, it makes sense to continually decrease the average cost per conversion so that your campaigns are increasingly profitable and maximize ROI.
Deciding how much to spend per click at the beginning of a new campaign needn’t be pure guesswork. You can “back into” the starting bid price by doing some easy calculations. Although the math is simple, the concepts are powerful. Your ability to calculate and track the following metrics will be largely responsible for the success of your advertising efforts.
Let’s start with one of the most important calculations: conversion rate, which is simply the percentage of clicks that result in conversions. For example, if one of your ad groups results in 200 clicks, and 40 of those clicks result in conversions, then the ad group’s conversion rate is 20 percent, as shown in the following calculation:
40 ÷ 200 = 20%
Cost per conversion is easily calculated, too. Simply divide the total spent on clicks by the number of conversions. In the previous example, if each click cost $1.50, the cost per conversion is (200 × $1.50) / 40 = $7.50.
Step 1 in this exercise is for you to estimate what you’re willing to pay for a sale or sales lead, which is the maximum cost per conversion (also known as cost per action, or CPA). Then you can calculate the maximum click price you can afford (also known as cost per click, or CPC). Before even starting a campaign, you need to determine (or even just estimate) your maximum acceptable cost per conversion. This should be the maximum you’re willing to pay for a sale, a lead, or whatever constitutes a conversion for your company.
If you sell only one item, this calculation is easy. If your product price is $35.00, and your gross profit on a sale is $20.00, you might set your maximum cost per conversion to be $10.00 to allow for a net profit of $10.00. This is calculated as follows:
$35 – $15 = $20 gross profit ÷ 2 = $10 CPA (cost per acquisition)
It gets a little trickier if you sell more than one product, or if your primary objective is to obtain sales leads, and you do not yet have enough data to estimate revenue stream or gross profit. But you need to start somewhere—so use average transaction revenue, or calculate the value of a lead based on your historical ability to convert leads to sales.
Armed with the maximum cost per conversion, you’re now on track to calculate the maximum click price (the CPC) you can afford. First, you need to calculate the number of site visitors it will take to obtain one sale or action.
If you have historical data on how well your site visitors convert, this calculation is a snap. The number of visitors you need to receive in order to make one sale is 100 divided by the conversion rate (represented as a whole number rather than a percentage). For example, if your conversion rate is 4 percent, your site gains a sale for every 25 visitors, as shown in the following calculation:
100 ÷ 4 = 25
Second, you need to use the previous two calculations to determine the maximum click price: the maximum conversion price divided by the number of visitors needed for one sale.
Continuing this example, if your maximum cost per conversion is $10, and your conversion rate is 4 percent, your maximum CPC is $10 multiplied by .04, or $0.40 (40 cents). Here’s the equation:
max CPC = max cost per conversion × conversion rate
This final calculation of maximum CPC is not simply a dry mathematical exercise—it’s crucial to the success of your PPC campaign. If you bid higher than the maximum CPC, you risk losing money. If you bid at or below the calculated maximum CPC, your campaign should remain profitable (assuming sufficient conversions).
What should you do if you don’t have historical data that lets you calculate the conversion rate, as in the case of a new product launch? There is no need to bid blindly. Start with your best guess. Be conservative or optimistic, but guess.
Assume these typical results:
- For most PPC campaigns, the minimum conversion rate should be 1 to 1.5 percent.
- Good conversion rates range from 2 to 4 percent.
- 5 percent and above is a very good to excellent conversion rate.
- Anything in the double-digit percentages is extraordinary.
For example, if you’re launching a new product and have determined the maximum cost per conversion to be $32, a conservative approach would be to assume a conversion rate of 1 percent. Thus, the starting maximum CPC bid would be $0.48 CPC or:
$32 × .01 = 32 cents per click
Another factor in determining initial click pricing is whether you want to reach maximum profitable conversion volume sooner or later. To help you with that decision, we’ll describe two different bidding strategies: aggressive and conservative.
Advertisers who use an aggressive strategy start bid prices at a high level— sometimes as much as twice the amount expected to achieve profitability. Then bids are lowered as data accumulates, eventually settling in at CPC levels that ensure profitable conversions. Obviously, this strategy risks burning ad dollars on the way to profitability. However, it enables advertisers to accumulate data quickly and test ads and landing pages in a relatively short period of time.
So the aggressive strategy is appropriate for advertisers who want or need to minimize the time necessary to attain maximum profitable sales volume or market share. It might be used, for example, by a retailer who wants to conduct conversionoptimization testing in time for the holiday buying season.
The conservative strategy suits advertisers who are more risk-averse, are working with low ad budgets, or have little experience with PPC advertising. As you might expect, this strategy calls for starting bid prices at a low level, and increasing them gradually over time, as ads and landing pages are tested and CTR and conversion rates improve. Conservative PPC advertisers minimize unprofitable conversions, but the amount of time between starting the campaign and achieving maximum profitable conversions can be much longer than if the aggressive strategy is pursued.
If you want to estimate how much time it will take to “test the waters” and get your ads on the first page of search results, Google provides a data point called First Page Bid Estimate.
How much does Google anticipate it will cost to show your ad on the first page of search results? First Page Bid Estimates can give you an idea of how much it will cost to appear on the first page of Google’s SERPs, as shown on the AdWords Editor interface in Figure 4.36.