How do i calculate actual cost i am willing to pay per click

Hi guys,

is there a formula or strategy i can use to calculate the maximum amount i can spend per click or should i just use googles traffic estimator? Basically i am trying to find out what is the max amount that a click is worth - does profit margin count? can you also give me an example? Also, what type of keywords are the best to use, should i have a range of 2 words per phrase up to 3/4 words per phrase?

I'd really appreciate the help!

Work out the average sale value you make on your site. Look at the current conversion rate for your site. If your conversion rate is say 4% and your average sale value was £30 then you could calculate that £30/4% = £1.20. So basically you can spend up to £1.20 per click, however this is not taking into account profit margains, so now work out your average profit margain. If it is 50% then £1.20*50% = 60p

Final Max CPC = 60p

As the campaign gets going you will start to see which keywords are more profitable and you may want to calculate this on a keyword level. My recommendation would be to set up Google Analytics with e-commerce tracking on it (if you haven't already)

so can you clarify this for me, if i were to work out my cost per click for say brand x 4 gig flash drives. i would look at the avg sale value of the those particular 4gb flash drives for that month. say if we sold 30 then the total sale divided by 30 to give avg sale value. my conversion rate is about 5% so it'l be around 1.5. Further, if my profit margin for those flash drives are 14.8% then that would equal 0.2 as my final cost per click right?

If you bid way low you get very little action. If you bid for #1 you get a lot of action. Your goal is to bid an amount that gives you maximum profit per day.

If you have not done conversion rate improvement before you get aggressive on your bidding them you will blow a load of dough.

Not necessarily, as someone buying from a flash drive might also buy something else. Look at your average basket value. Also as EGOL says bid at that level and you are unlikely to attract any traffic. It may well be worth trialing starting at a higher CPC and making a loss but getting enough of an understanding about which keywords convert and then start to reduce CPC's.

Thanks Guys,

So wait, should i work our the cpc on the avg value per basket and not on the product categories or specific products? For example, if i wanted to calculate the maximum cpc of iomega 160GB external hdd, wouldnt i work out the average sale value and multiply that by the conversion rate then multiply that value by the margin of that specific product category? or am i way off?

You may calculate your current cost and avg cpc using this formulae:

COST CONVERSION = TOTAL COST / NUMBER OF CONVERSION

Avg.CPC = TOTAL COST / NUMBER OF CLICKS