Many of us marketers have repeatedly asked ourselves: How much can I afford to pay for CPC bids?
Nowadays, there are too many marketers who are not analytical enough and do not make decisions based on the data we have available in digital. They act as if they are participating in traditional media, where things are much less tangible due to the lack of transparency and data. This is no longer an excuse. This does not mean that you should always let cost efficiency dictate your budget allocation – for some brands, it is absolutely necessary to get visibility bid for unprofitable keywords (regardless of your attribution model). However, the determination of a correct CPC is something that most PPC books do not address and on the other hand Google, Facebook, etc. They have little interest in helping you (they will be happy to suggest an increase in bids though).
Leaving branding aside, many marketers are running their campaigns on a very tight budget, where the cost of acquisition (CPA) defines the success or failure of the company – at least in the short term.
In these cases, it is surprising that we still find marketers who look at irrelevant metrics as if an ad is displayed in a particular position in the SERP (front page vs. second page or the top of the fourth), or if the target audience a graphic ad (display) works or not. In the world of Performance Marketing, for the purposes of user acquisition, none of those things matters. What matters is the cost of acquisition.
Focusing on this metric does not have to be complicated. A good analysis in Excel is enough. For example, if you are an e-commerce company and know that you can afford a CPA of a certain amount, then it is easy to find out how much you can afford to pay for each click. Your cost per visitor should not exceed your gross profit per user. Depending on your business, you can even set the lowest goal. In that case, it’s simple. First, a couple of definitions for the calculations:
- Cost per visitor = CPC / (1 – abandonment rate)
The abandonment rate is the percentage of people who click on an ad, but for various reasons do not end up on your website. This is a particularly frequent scenario in certain platforms, for example, Facebook.
- Gross profit per visitor = Gross profit per order * Conversion rate
Now, the real calculation. Remember that the highest cost that we can afford per visitor is in the scenario in which the cost of a visitor is equivalent to the gross profit that the visitor entails.
- Cost per visitor = Gross profit per visitor
- CPC / (1 – abandonment rate) = Gross profit per order * Conversion rate
As the gross profit per order in an equilibrium scenario equals the highest cost per order (CPO), the highest CPC we can afford is therefore:
Maximum CPC bid / (1 – abandonment rate) = Gross profit per order * Conversion rate
You obviously will not know your expected conversion rate for a brand new marketing campaign, so you’ll have to make a guess and take the hit if it’s too high in the beginning, and you can optimize later.
Remember, this calculation gives you a ceiling for your expenses, not necessarily a level to aspire to. It is expected to help avoid stupid mistakes like overpaying to stay on the first page of a search engine or show a certain audience on Facebook. You may have other reasons to bid for a different maximum CPC than previously calculated. Such reasons include, for example, lack of budget / financing or if the conditions of the auction indicate that you can obtain the same or almost the same traffic at a much lower price (ie, optimize your profit).