Many advertisers delve into the world of Pay-Per-Click (PPC) marketing (sometimes known as Cost Per Click or CPC) without realizing the analytical data available to them. And thus not realizing the simplicity to finding the correct amount of money to place on your bids. With the simple equation listed below, you will never have to worry about overspending on your campaigns again.
A client once said to me, "It is not the cost of any marketing that concerns me, it is the return that I receive for the cost. That is the important part." It doesn't matter if you spend $5 or $50,000, if you are not getting your expected return, it is wasted money no matter how much or how little is spent.
A very common scenario that many marketers do is to look at what their top competitors are bidding and aim to beat out their bid. And others set their aim on the number 1 position and want to be there no matter what the cost. Number one is a great place to be… but not when you are losing money for the effort. Do the numbers before you begin:
- Average Revenue per Customer (ARC): How much is an average customer’s revenue over the span of your relationship? – How much money will a new customer deliver to your business?
- Sales Cost Percentage (SCG): What percentage of the revenue listed above (ARC) you are willing to spend on marketing and sales to acquire new customers?
- Close Rate (CLR): What percentage of leads actually close and become customers?
- Conversion Rate (CR): The percent of clicks on your website that convert into sales leads?
ARC x SCG x CLR x CR = Maximum Bid Price
Now time for an example. Your company (or your client's company) averages approximately $2,000 per year per customer and their average lifetime is 3 years totaling their ARC at $6,000. They spend 10% of their sales revenue to acquire new customers. Their sales team is closing 10% of their leads and their website is converting 3% of their traffic into leads that their sales team can work with. Here is the equation:
$6,000 x .10 x .10 x .02 = $1.20/click
This means that the maximum amount that the company should be paying for a click on their keyword is $1.20. They can place their maximum in a system like Adwords and feel comfortable that Google will not go above this and they should not be losing money on their marketing efforts.
Many times these numbers are not readily available and then assumptions need to be made. However, more often than not, when the numbers are run, they don't appear to add up correctly. You may come up with a maximum CPC bid of $1.20 and realize that your competitors are bidding on at $12.00/click.
At this point, you would need to re-assess your marketing strategy and tactics.