Determining Maximum CPC

It’s easy to lose sight of the effectiveness and viability of your PPC spend when you just look at your overall budget figure for the month (or year) in isolation. Chasing ad positions and clicks by increasing CPC without considering revenue targets can lead to losses.

PPC

We would encourage you to find out your organisation’s lead and sale conversion metrics first and work out your tolerances to ensure you remain profitable. This in turn will guide your bidding strategy and show you when it’s time to stop increasing CPC. Instead look at alternative strategies such as improving Quality Score or refine Ad Groups to improve your ad position.

Marketing Budget

Can you work out the cost of acquiring a single online sale? How many clicks are required to complete the journey from either a branded or unbranded search keyword phrase? Then how many through your website and your shopping cart to successfully complete a purchase? Let’s look at some fictitious numbers that are rounded for ease of calculation to see how you can arrive at an average cost-per-click that delivers the sales needed to hit target. Let’s say that your business has gross annual revenue of £2 million per year and on average a transaction value of £80 (already factored to include an average returns rate). If you allocate 15% of gross revenue as a marketing budget and spend it solely on Google Ads – that gives you an annual marketing budget of £300,000. A final metric we need to know is the conversion rate – let’s say that you are seeing an average 4% click to conversion rate.

Acquisition Cost

To generate £2m from £80 average orders would require 25,000 transactions per year, this works out to 2,083 per month or 68 per day on average. This will be your conversion target to help you track performance and forecast target sales volumes throughout the year. How much can you afford to spend for each sale on average? Divide your £300k budget by 25,000 transactions required to generate £2m in sales and that gives you a maximum acquisition cost of £12 per sale. If you are seeing a 4% conversion rate from clicks to your website then that means 4 sales from every 100 clicks will convert (or 25 clicks per individual transaction). With a maximum £12 acquisition cost divided by an average 25 clicks needed to generate a sale gives you a maximum CPC of £0.48. For your sector what position does that give you?

Setting Budgets

Taking activity and sales at a flat rate (we know that there will be peaks and troughs throughout your week and year) you will have a monthly Google Ads budget of £25,000. This is an average day budget of £821 for all your Campaigns and Ad Groups. Based on the maximum £0.48 CPC you will need to be driving 1,712 clicks per day. A 4% conversion gives you 68 sales generating £5,440 revenue. This puts you on target for your £2m per year.

Making Improvements

Of course you’ll want year-on-year growth so can you afford to reduce the CPC from £0.48 to drive more clicks than 1,712 for the same day spend? If you can do this it will allow you to drive more sales for the same marketing budget. Combined with CPC you will also want to be looking at a number of other factors to maximise your potential position in the results. Improving Quality Score as much as possible can reward you with a higher position or lower CPC needed for a higher position. Try and focus your Ad Groups even more to better target your keyword phrases and ad copy. This will hopefully leading to a higher click through rate (CTR) and more clicks in your acquisition funnel.

Of course this is a simplistic summary and you will see a broad spectrum of CPCs across your Ad Groups and Campaigns. Some clicks will be significantly below your average and others above – keep optimising your account to drive maximum clicks for your day budget. Hand-in-hand with Google Ads account optimisation is the assessment of your website conversion funnel. How you could improve conversion rates and cart values when the visitor arrives at your website? Google Ads has some great functionality to manage targeting, bidding and conversion tracking so use these to help you get the most out of your paid search budget. You can also choose to let Google Ads manage your bidding strategy on a CPA basis.