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Strategy #6: Bid What It’s Worth
There’s another approach to AdWords bidding that’s a bit more internally focused. With this strategy, you determine how much a given keyword is worth for you, and then bid that amount. It’s not so much about ad position, but rather about getting your money’s worth from your ad expenditures.
This strategy is triggered by the value of each click to your site, which means it is particularly suited to companies that sell goods or services on their websites. The key is to determine the optimal CPC for any keyword.
You start by calculating how much profit you make off a sale from your website. Next, you determine the conversion rate for a given keyword—what percentage of total clicks result in sales. Divide the profit per sale by the conversion rate, and you end up with the maximum CPC you should be willing to pay.
As this strategy is a bit more complex, let’s work through an example. Let’s say you sell a product on your site that lists for $50, costs you $30, and thus generates $20 profit per sale. Let’s also say that you have a 1% conversion rate (1 out of every 100 clicks results in a sale), which is about average. Divide the $20 profit per sale by the 100 clicks it takes to make a sale, and you find that each customer you attract costs you $0.20. This means you can afford to spend a maximum of $0.20 per click before you start losing money on each click. This means you’d set your maximum price per click to $0.20.
Naturally, your conversion rate can very over time, which means you need to monitor performance over the course of a campaign. And, of course, if you don’t sell products on your website, and instead use your advertising to generate non-sales leads or build your brand image, this approach is pretty much unworkable. Still, if you’re advertising to generate online sales, this isn’t a bad strategy.