When preparing to begin a pay-per-click (ppc), or sponsored search, campaign, it really helps to go into the situation with an idea of what the numbers look like. By “the numbers”, we mean what kind of return on your investment you can expect assuming different bid levels and different conversion rates. Following is a chart that is an example of one we might create when beginning a ppc campaign to give the client and ourselves an idea of what he might expect his return on ad spend (ROAS) to be. It also helps us establish a benchmark average bid.
These numbers are reflective of a company selling a fairly high priced item. We have used a range of conversion rates from .10% (1 in 1,000) to 2% (2 in 100). For a high priced item, we would expect a low conversion rate for online sales, possibly 0.25% (1 in 400). Assuming a 0.25% conversion rate, the $.50 bid makes more sense than the $.75 bid because it generates a ROAS of 548% (or $5.48 in revenue for every $1 spend), versus 416% for the $.75 bid.
However, at the $.50 level, you are going to receive fewer clicks to your site. If the ROAS at the $.75 level is acceptable, you may want to use the higher bid to generate more total revenue. In this example, the $.75 bid generates $42 thousand in revenue, versus $31 thousand for the $.5o bid.
The question of how much to bid may also be determined by your budget for the campaign. At higher bids, you are going to burn through your budget quicker. If there is so much keyword inventory related to your business that you are able to use up all of your budget regardless of what you bid, then it makes sense to bid lower…if ROAS is your main consideration.
If there is a branding component to your online marketing, then you may want to bid higher for higher positioning on the page. Another consideration is that not all sales are made immediately. If you position yourself as the leader in your category (high on the page), you generate more immediate traffic and more potential future business from prospects who visit your page but don’t immediately do business with you. This branding component is not reflected in the kind of analysis we displayed above.
An analysis like the one above can easily be prepared using a spreadsheet, and we highly advise you perform this kind of analysis to get a feel for your numbers. Use the sponsored search control panel for whatever search engine you want to use to get an idea of what bids for keywords in your industry look like, along with how many clicks you can expect to generate at different bid levels. Using this information, you can estimate how much revenue you could generate assuming different conversion levels. Then you can calculate ROAS at different conversion levels. Doing this for each of the major search engines will also help you determine the best place to spend you money.