I’ve been working on a project at work regarding our search engine marketing and the higher ups would like to know how the whole pay per click program works. To make it easy, I wrote a little summary of what are the key factors I look at when I start a campaign and didn’t want to waste all that work, so I’m going to post it and change the numbers around so I don’t get fired :). So here is the basic knowledge you have to know to find the maximum bid your company can pay in your pay per click campaigns.
Formulas to Know
Cost Per Click (CPC) = Total Cost of Campaign / Total Clicks from Campaign Landing Page
Conversion Rate (CR) = Total Number of Leads / Total Number of Page Impressions
Cost Per Action (CPA) = Cost Per Click / Landing Page Conversion Rate
Lead Value = Value of Sale * Lead to Sale Conversion Rate
Gross Margin = (Lead Value – Cost Per Action) / Lead Value
Assumptions
• Landing Page Conversion Rate = 10%
• Lead to Sale Conversion Rate = 25%
• Value of Sale = $100 - Determined by Total Profits divided by number of Sale
• Lead Value = $25 - Determined by Total Profits divided by number Leads
Goal
• Find Maximum Cost Per Click for a 20% Gross Margin
Solution
• Maximum CPA = Lead Value - [Gross Margin (20%) * Lead Value ($25)] = $20
• Maximum CPC = CPA ($20) * Landing Page Conversion Rate (10%) = $2.00
Example
Budget = $200
Clicks = 100
Leads = 10
Sales = 2.5
Total = $250
Gross Margin = (Revenue - Cost)/Revenue = (250 - 200)/200 = 20%
Now go take a look at your site and see what kind of variables you already know. Once you figure out what they are, you can plug it into these formulas and start scaling up your ad campaigns.
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Nice post dude! Now people have no excuse on saying how much do i bid!
Well done!
Thanks for the post, will pass it round the office.