How Much To Bid? It Depends On ConversionIf you are selling online, there is a good chance that Pay Per Click (PPC) advertising is in your marketing plan. Measuring Return on Investment (ROI) is critical to the success of your PPC campaigns. Not measuring your ROI is like trying to drive while wearing a blindfold.
It is important to understand your site's conversion rate then increase it. For example, let's say you bid $.10 per click for 35,000 visitors for a total cost of $3500 per month. Let's assume that conversion rates are 2% of that traffic, yielding 700 orders, and average order size is $50 (2% is quite typical of online retailers today according to a recent Shop.com study). With this simple math, a $3,500 PPC investment is yielding $35,000 in orders (700 x $50). If you were operating on a 33% mark-up from costs, you'd have had $8,050 in profits. That was reached by the following: $35,000 x .33 = $11,550 profits before PPC - $3,500 PPC spend = $8,050 net profits or a 230% ROI from initial investment of $3,500 and gross profits before PPC of $11,550.
Now, let’s assume that your competitors are becoming more aggressive, driving prices up to an average of $.20 per click. You are now spending $7,000 to get $35,000 in orders. That clearly cuts into profits. Calculating, we arrive at: $35,000 x .33 = $11,550 gross profits before PPC - $7,000 PPC spend = $4,550 net profits. That's still a 65% ROI, but a lot less than 230% at $.10 per click. If prices continue to go up to $.30 or $.40, you can see how this would affect your ROI. When does it make sense to stop increasing your bids?
To answer this question you will need to determine a break-even point. Using the figures from the above example, if you brought in $35,000 in sales for the month and have a 33% mark-up you would be making $11,550 gross profit before PPC costs. Now, dividing $11,550 by 3,5000 unique visitors means a breakeven bid price of $.33 per click. A useful pay-per-click calculator tool can be found at http://www.webpositionadvisor.com/tools/ppc_calculator.php.
In this example, your average bid price should never exceed $.33 per click. Of course, this excludes other operating expenses like salaries and rents, etc.
As these prices rise and your desire to maintain the same level of traffic remains the same, tremendous benefits can come from increasing conversion rates. After all, that is the one facet of the equation that is within your control.
All of the above calculations are based on a conversion rate of 2%. What if you improved the site’s web design and used a customer-friendly shopping cart with a navigation system that focused on decreasing shopping cart abandonment? It could be possible to increase conversion rates to 3% while everything else remained unchanged. Let's again assume bidding $.10 per click for 35,000 visitors for a total cost of $3,500 per month. A conversion rate of 3% yields 1,050 orders, and average order size is still $50. Now, a $3,500 PPC investment is yielding $52,500 in orders (1,050 x $50). If you were still operating on a 33% mark-up, you'd now have $13,825 in profits ($52,500 x .33 = $17,325 gross profits before PPC - $3,500 PPC spend = $13,825 net profits). That yields a 395% ROI. Now that's impressive!
With that 3% conversion rate, you now have $17,325 in gross profits for the same 35,000 unique visitors, meaning a new breakeven bid price of $17,325/35,000 = $.50 per click. If bid prices go up past $.33, you are still in the game. If they stay at $.10 those profits could be reinvested and used for increased marketing activity. Of course you could also channel those extra profits towards other areas of your budget, like telling your boss that you deserve a raise!
