Pay Per Click advertising - PPC bidding calculations
Bid calculations have always been a basic of pay per click advertising. How do you know exactly how much to bid on each keyword? Your bidding strategy should be based on the economics of your market and the conversion rate performances of your site.
Profit and PPC
Profit = Revenues - Costs
Profit is the bottom line number. Most businesses involved in PPC advertising want to maximize profit, but profit can be hard to maximize when there are moving parts. Increasing advertising spend will bring in more customers, but you must ensure it will also increase profits. Bringing a large amount of traffic from your ads is only a partial success, your website must convert visitors into leads or sales.
Cost Per Action (CPA)
CPA = Advertising Costs / Number of
CPA measures how much it costs for you to obtain the desired action from your traffic. The definition of an action depends entirely of the type of business you want to promote, it might be a simple registration or lead, the purchase of a product or a service.
The CPA is helpful for you to determine how much it costs to acquire a buyer, therefore you can set your advertising budget regarding your profit goals.
It is also important to know what a buyer is worth. In order to do that, you need to know how much a buyer typically purchases and what is the benefit that you make on that purchase . Knowing how many visitors actually convert into buyers is also necessary for this type of calculation so you should track your PPC campaigns carefully. The key metrics of CPA are : Conversion rate, margin and the average amount of a purchase.
Return on Advertising Spend (ROAS)
ROAS = Profit / Advertising Costs
The Return On Advertising Spend measures how effective the advertising spend is at creating profits. Most businesses prioritize their spending based on how much payback it will issue. Sometimes businesses will set a hurdle rate, or a minimum threshold for that payback. Each market is unique, so one business
will have a very different barrier rate than another. No matter the barrier rate, ROAS will show you what rate of return you are getting from your advertising spend.
Return on Investment (ROI)
ROI = Profit / Total Costs
The ROI measures how effective your overall business spend is at generating profits. ROI is essentially the same as ROAS but takes into account all of your costs, not just advertising spend. The key metrics for ROI bid calculation are : Estimated average cost per click, profit per conversion, total number of click on a given date range and of course the conversion rate.
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