The Value of a Click
I’m often reminded of the game show “The Price is Right” when reviewing campaigns created by new PPC advertisers. Bids and budgets are often set on whims and feelings. The only problem is, this isn’t a game. This might be why most new advertisers are a bit scared when they have to give bids and set budgets; they often feel arbitrary.
The beauty of PPC advertising is the incredible amount of control you have by being able to say exactly how much you want to pay per click for a segment of the population that you are targeting.
In this lesson, I am using the term keywords to reflect the elements that are being targeted in an ad group and need their own bids. The same concept applies to any list of targeting that need their max CPC bids to be set in a particular ad group.
The Max CPC bid is a price you set as the most you are willing to pay per ad that is triggered by a particular keyword. Keywords each get their own individual bid, however, you can set all keywords in an ad group to have the same bid by using only the ad group bid setting without bidding on the actual keyword itself. Google’s ad auction works such that the price you actually pay will be $0.01 higher than the price needed to rank above your competitors. Better yet, it’s without exceeding your Max CPC bid. This is the actual cost per click, or CPC is always less than your bid.
A keyword is profitable when the clicks it sends to your website results in more money earned than the cost of the click itself. The money that the keyword earns per click is its value per click (VPC).
A simple formula to calculate VPC is as follows.
Value Per Click = Conversion Rate X Value Per Conversion
Let me explain why with this simple yet exaggerated example. If your value per conversion is $100 and half of your clicks result in conversions, the value of one click would be $50.If half of your clicks convert, your CVR is 50%, so 50% multiplied by $100 is $50. In reality, conversion rates tend to be only a few percents, sometimes less than 1%.
Two conditions need to apply in order for this VPC formula to give accurate Max CPC bids:
- First, conversion rates from the past need to be representative of future conversion rates.If you sell costumes and are setting bids in November 1st for costume related keywords based on conversion rates from October, your bids won’t be accurate as conversion rates for November are likely to drop.
- Second, the sample of data you base your value per click calculation on needs to be significant enough to be accurate.
If your business is seasonal, you need to keep the first condition in mind. Perhaps check how performance changed in previous season so that you can proactively adjust your bids. The second condition presents us with the biggest challenge.
I will give examples, some of which are exaggerated, to explain this problem. The value of a conversion in these examples is $100.
If a keyword sends 5 clicks to your website, and one results in a conversion, your conversion rate will be 20%. Using the formula, Value Per Click = Conversion Rate X Value Per Conversion will give you a VPC of $20. This is only true if the next 100 clicks bring you 20 conversions. In this example, you have very little statistical confidence to give that $20 bid so you shouldn’t. If you do, you run the risk of overbidding on the keyword, a potentially costly mistake.
Now If a keyword sends 1000 clicks to your website and 200 of them result in conversion your conversion rate will again be 20%. Using the formula Value Per Click = Conversion Rate X Value Per Conversion, you will again get a VPC of $20. In this example, you have enough confidence to predict how the keyword will perform for the next 1000 clicks. You can bid with confidence.
Here is another example, this time a bit exaggerated. Let’s say a keyword sends 2,000 clicks to your website and only 2 converts, meaning your conversion rate will be just 0.1%. This means that your VPC is just 10 cents. Even though you have low conversion numbers you do have confidence that this keyword has almost no value. If 2000 clicks brought only 2 conversions, it will be highly unlikely that the next 2000 clicks will bring the amount needed to make the keyword have a significant value.
A simple way to test would be to ask yourself if one or two more or fewer conversions would make a difference in the VPC. In the first example, where 5 clicks resulted in one conversion, one or two extra conversions would make a massive difference in the outcome of the calculation of Value Per Click. But in the second example, where 1000 clicks resulted in 200 conversions, the VPC would stay about the same if there were 198 or 202 conversions.
Understanding how to properly give the value to a keyword will bring you one step closer to PPC greatness.