Many marketers struggle to know how much they should be spending on their campaigns. In a cost per click model, advertisers pay for every click on their ads. And for these CPC campaigns, you need to set a maximum cost-per-click bid, or the highest amount you’re willing to pay for each click. But how do you know what makes a good CPC? Today we’re giving a simple three ingredient formula to determine the perfect cost per click for your business.
The first ingredient you need for a good cost per click is the revenue of the item you’re selling. For the sake of simplicity in this walkthrough, let’s say the item that we’re selling is worth $100. Make sure to always update your revenue for any sales or coupons you’re running during a campaign.
The second ingredient is the average conversion rate for your sales funnel. Your conversion rate is the amount of people coming into your funnel, versus the number that make a purchase. To calculate this, simply divide your purchases by the number of impressions (or the number of people who saw your page). For the sake of our example, if we had 500 people come into our funnel, and 50 purchases, our conversion rate would be 10%. Again, this is for simplicity. Average conversion rates are usually much lower, typically 4% or less.
The third ingredient for this formula is your target return on investment. Your return on investment is your dollars in revenue versus the dollars spent in ad spend. Generally we look for a 5:1 return on investment, meaning you make $5 for every dollar spent on ads. This of course may vary depending on your company or industry, but it may serve as a benchmark. So for our example, we need to make $500 on every $100 we spend on ads.
Now it’s time to put everything together! To find our target cost per click, we’ll take our revenue per sale times our average conversion rate, then multiply by 20%. So for the sake our example, that would be:
$100 revenue x 10% conversion rate x 20% = $2 target CPC
This formula gives us a target cost per click of $2. Now, this is going to be the highest CPC that we want. Ideally, we want our cost per click to be even lower to really optimize our ad spend.
When are ads worth it?
This formula is relatively simple to use, but it’s not always the most intuitive. How do you know when it’s worth it to run ads? For many industries and platforms, the ideal cost per click is difficult to achieve. Not every product is worth running ads for, and you don’t want to throw money away. But, there are other reasons to run ads other than strictly making money. You might want to test landing pages to improve your conversion rates, or gather information to optimize your products, pages, and offerings. Just because you don’t make money during this ad run, doesn’t mean it won’t be good for your business in the long term.
We hope this has been helpful on your search for the perfect cost per click. Check out our YouTube channel for the full video! If you have any unanswered questions about conversion rates or finding your ideal CPC, feel free to contact firstname.lastname@example.org.