How to decide the maximum CPC for your product/service
By
David Mytton,
CEO & Founder of Server Density.
Published on the 27th January, 2011.
Search based advertising is uniquely placed to capture potential customers at the best possible time – when they are actively looking for your product or service. Once you get your Google AdWords or Microsoft adCentre account optimised, you can literally spend money to make even more money where the return is limited only by how much money you can spend upfront. However, the difficult part is figuring out the different variables so you’re not hemorrhaging money.
Unfortunately pay per click (PPC) advertising has a lot of these variables but one of the most important is the maximum cost per click (CPC). This determines whether your ad will show with other bidders, the position and how quickly your budget gets used up. The problem is determining what the maximum CPC should be.
For the purposes of this post I’ll be talking about Google AdWords since it is probably the most well known (even if it does have problems) and the one I know best, but similar principles apply to other services.
It depends on your goals
Google provide a number of tools to allow you to estimate cost and traffic based on a certain CPC and budget. Some keywords are extremely competitive, which tends to be the case for broad generic terms. For example “web hosting” suggests a maximum CPC of £8.63 ($13.76) with a daily search volume of 1,234 totalling £10,886.99 ($17,364.29) to be in position 1.
What you set your maximum CPC to depends on your goals for the campaign. If you just want to maximise traffic then you want to try and get the best position so you could just try and outbid everyone else. This will be expensive. But if you want to get a return on your spend then you can’t just blindly choose a figure to get to the top.
What you’ll need
To figure out your maximum CPC for your product or service, you need to know a few things:
- Your website visitor conversion rate. This will allow us to determine how many clicks will actually convert. It will act as a starting value because you will hopefully be able to optimise your landing pages to specifically improve the AdWords visitor conversion %, which will likely be different from your general website conversion %.
- Your customer lifetime value. This might be a single figure for a one time product purchase or calculated based on the average monthly revenue per customer multiplied by the average account age. For example if your average customer spends £10 per month and stays with you for 12 months, your LTV is £120.
Calculating your maximum CPC
For this calculation we will use the following figures:
- Conversion rate: 1%
- Lifetime value: £120
If you get 1,000 clicks then with 1% converting, that gives us 10 conversions.
The total value of those 10 conversions is £120 * 10 = £1,200.
So for those 1,000 clicks, you can’t pay more than £1,200 / 1,000 = £1.20 per click.
It’s just an average
The important thing is that the figures we use are averages and the real results will likely differ, but overall they will work out. For example it may take you 1,200 clicks to get 10 conversions but they might be higher value because they choose a more expensive pricing plan or remain customers for longer. You need to be measuring the performance of the campaign closely using conversion tracking tools to make sure your figures are correct and you are getting a return.
PPC often seems like a black box sometimes, but once you know a few things about your sales funnel you can work out the best values to experiment with.