Engaging in a pay-per-click ad campaign with the major search engines can be confusing--and costly. Is it worth it to bid for the top spot? How much can you afford to spend, realistically? Richard Ball walks you through the cost-per-click equation and warns about the potential pitfalls.
Identify Max CPC
PPC (pay per click) bid management begins with identifying the maximum CPC (cost per click) you're willing to pay for a given keyword phrase. If you do not know this value, it is not advisable to engage in PPC advertising. The max CPC will change over time and could vary from search engine to search engine. If you don't know this value, start with an educated guess. This could be based on an industry rule of thumb or on internal factors such as profit margins. For example, let's suppose you're bidding on the keyword phrase "nike shoes" but do not know your max CPC. One way to estimate a max CPC involves taking the top 5 bids on Overture and computing the average. The current bids are: $0.51, $0.50, $0.33, $0.32, $0.31. The average is 39 cents. Use that as your max CPC to begin with.
A better approach is to base the CPC on your profit margins. Let's suppose your average sale price on a pair of Nike shoes is $80 and your profit margin is 20%. That leaves $16 of profit for each shoe. Also, assume that your conversion rate will be 1% (this is a conservative estimate). For every 100 visitors from a PPC ad, you expect 1 sale. If you have $16 of ad to spread over 100 visitors, you have 16 cents to spend per click. Another way to approach this problem is to have an ad spend based on revenue. For example, if your goal is to spend 15% of revenue on advertising then your ad spend would work out to $12 per shoe. Again, assuming a conservative 1% conversion rate, that would leave you with 12 cents per click. As your campaign progresses and you determine your actual conversion rate, adjust the CPC accordingly.
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