CPC Calculations: How to Calculate Your Max CPC
The beauty of AdWords is control. In digital marketing it is rare to have so much control as you do in the world of PPC.
But this level of control brings along its own unique challenges.
You need to be organised.
If you don’t know your product costs, margins and profits – you’ll never be able to make the most of your account.
Now, let’s take a look at what your maximum CPC is and how to calculate it.
What is Maximum CPC?
Your maximum CPC bid is the highest amount you’re willing to pay for a click on your ad.
If you’re familiar with how AdWords works, you’ll know that you don’t always pay your maximum bid.
For example, let’s say I’ve set my Max CPC at £2.
I won’t have to pay £2 every time someone clicks my ad. What I pay is calculated in an auction between me and anyone else bidding on that keyword.
My Max CPC (how much I’m willing to pay) is multiplied by my Quality Score (Google’s judgement of the quality I’m providing to the searcher) to determine whether I’ll be 1st, 2nd, 3rd and beyond.
Once my position is decided, Google takes the position of the advertiser one place below and divides this by my Quality Score and adds 1p.
This means that although my maximum bid is factored into deciding the position I’ll be in, I never pay more than I need to.
You don’t want to get confused between your Max CPC and your Actual CPC (or Avg. CPC). Your Actual CPC is the average amount you’ve paid per click and could be significantly lower than your Max CPC.
Got it? ?
How Do I Set My Max CPC?
You have a couple of options of how you can set your Max CPC.
If you’re confident, you can set your Max CPCs manually. ?
You can set a Max CPC at ad group level and set bids for individual keywords too.
If you want Google to decide instead, you can set your Max CPCs to be generated by Google with automatic bidding.
With automatic bidding, you just set your daily budget and AdWords aims to get you the most clicks possible by adjusting your Max CPC accordingly.
It’s up to you which you go for, but as we’ve already said, control is the true beauty of AdWords. Some would even go so far as to say you should NEVER use AdWords automatic bidding.
If you know which of your products has a higher profit margin, or certain keywords are more likely to convert (or lead to higher value conversions) – manual bidding is the perfect way to make sure that your key products are shown.
In fact, if you want to improve the profitability of your account, handing over control of how much you spend is pretty counter intuitive. ?
The vast majority of advertisers who have any level of experience in AdWords will use manual bidding – and we think you should too!
What You Need to Calculate your Max CPC
AdWords is like any other part of your business. You need to weigh up losses and gains. ⚖
How much will it cost and how much will you make from it?
Now, that might sound simple enough (and it is) but you’d be surprised how often this is totally ignored by new users of AdWords.
For example, if I buy a loaf of bread for 10p and I plan to sell it for £1.
That’s 10p cost and 90p profit, right?
Let’s think about overheads – shop rental, utilities, staff costs etc.
Of course, I stock lots of items in my shop, but let’s say this accounts for around 30p in that £1.
So, we’re on 40p cost and 60p profit.
Now, let’s start advertising.
If you spend 60p on advertising this loaf, you’ll only break even. So you need to spend less than that.
How much profit do you want to make this all worthwhile? Let’s say 30p.
That gives you 20p to spend on advertising this specific loaf of bread.
Now factor in that only 2% of people who look at the bread will buy it. That’s 1 in 50 people.
So, that gives you an average of 0.004p per person to spend on advertising this loaf of bread.
Not much, is it?
Certainly not much considering how much profit it looked like we were making at first.
So What Do I Need?
To calculate your Max CPC, you have to do exactly the same thing.
Your clicks are your ‘people’, your product is your ‘bread’ and your overheads, well, they’re just your overheads.
To calculate your Max CPC you need to have a strong idea of your profit margins – the more information the better!
If you’re working along, you need to get yourself:
- Average profit made per customer
If you can specify by product, that’s even better! Include all overheads here.
- How many leads does it take to make a sale
If you’re focused on lead generation, you need to find out how many leads it takes to make a sale (and the average value).
- Conversion rate
What percentage of visitors to your website purchase the product/make an enquiry?
There’s a couple of things to consider here.
Don’t forget to consider lifetime value of a customer. For e-commerce stores, subscription-based businesses and businesses offering a tailored or bespoke service, repeat custom is common.
For example, let’s say your average sale is £500 and your margin in 10%.
If you sell your product you have a profit of £50.
It costs you £45 to get that purchase.
Now your profit is just £5.
But, if your average customer orders 5 times over the next year, then their lifetime value is £250.
Now – you’re sitting on a nice £205 of profit.
As we’ve said, you want to be as specific as you can. ?
Different product lines, types of services and areas of business will make you different levels of profit – but they’ll also make people more or less likely to convert in the first place.
By separating out your conversion rates for different product categories or services, you’ll have a better idea of how much you should be spending.
Another factor in conversion is familiarity. A way to stop this from skewing your conversion rate is by filtering out searches that include your brand name.
Someone who knows your brand is more likely to convert – this could lure you into a false sense of security with a higher average conversion rate than is likely.
This is the hard bit. ?
Once you’ve got the information above – at as much detail as you can muster, here comes the easy bit.
How to Calculate your CPC
So, you’ve got the essentials.
Now you need to calculate the CPC you’d need to break even.
Average profit per customer: £100
Conversion rate: 2% (1 in 50)
Conversion rate x Profit = CPC to break even
0.02 x £100 = £2
So your Max CPC MUST be less than £2 – otherwise you’ll be making a loss.
The lower you go, the higher your profits. But go too low and you’ll be limiting the number of conversions you can get.
Monitoring your progress over time will find the point that works best for you – getting the right amount of conversions at the right price to maximise your profits.
Some say this can generally sit around 70% of your break even CPC – but this will differ for every business.
It’s best to regularly experiment, improve, monitor and NEVER go above your break even CPC.
Work to improve the overall health of your account – work on your quality score and conversion rate will make your clicks cheaper, making you more profit!
If you’re not sure where to turn, try us!
The PPC Geeks can help you calculate your max CPC and work with you to optimise how much you spend to get you the best return on your investment.
Get in touch to find out how we can help today.