One of the most important aspects when starting a new promotion with pay per click (via AdWords, Yahoo!, MSN, and others) is determining how much you should bid when setting your maximum cost per click (CPC).  This is a topic that is often wondered about and rarely discussed – because there is no definitive answer.  However, we can narrow down the options and back into the numbers to arrive at a starting bid when getting your new PPC campaign up and running.

What Google says about setting a maximum CPC

The guidance that we get from Google is vague at best.  Here is what they have to say about setting your maximum CPC:

The bid you set is entirely up to you. Your maximum CPC bid should be the amount you’re comfortable spending per click, taking into account your sales objectives and the amount of exposure or site traffic you’re looking for. The more you bid, the better the chances that your ad will appear frequently. – Google AdWords Help

What you need to determine your starting max CPC

One of the best ways to determine how much to set your bids at when starting a new pay per click (PPC) is to back into the numbers using goals and benchmarks.  To do this, you will want to examine several different things:

• Conversion rate – The standard number when trying estimating conversions for a product that you have no history with is 1%.  However, you will want to be conservative with your numbers, so let’s assume a 0.75% (three quarters of a percent) conversion rate.  It may be higher, and if it is, you will be all that much better off.
• Profit per sale – You need to know how much money you will make (in profit) when you make a sale.  If you don’t know exactly how much – use a rough figure using your best judgment.  If you have several products, taking an average is often the best way to approach this.

Calculating your starting maximum CPC

Now that you have identified a conversion rate to use and your profit per sale, you can calculate your beginning maximum cost per click. I highly recommend using Scott Bourch’s free max CPC calculator that allows you to input your profit and conversion rate that then calculates how many visitors per conversion and your max CPC.  In our example, it gives us the following results:

We’re not quite finished

As you can see, with a 0.75% conversion on a $20 item we can afford $0.08 just to break even.  However, since you are trying this campaign for the first time, we want to increase the bid.  Our goal is to get clicks and get some sales to see where our conversion rate will end up settling.

We will use the numbers above as a benchmark and reference to give us a good idea of where we need to be, and will adjust accordingly over the life of the campaign.  To set our bid, I recommend choosing a high number that you are comfortable with and then slowly decreasing your bids.  In the example here, I would probably start with a multiple of 5 or 6 times our estimated bid to begin with ($0.40 – $0.50).  Everyone is different and has different views on whether to begin – however, I have used this method very successfully across several campaigns to get them started.

Tweaking and testing

Whatever you end up going with for your initial bid, your goal is to increase conversions.  It does not matter whether you pay $0.10 per click or $10.00 per click as long as your conversion rate can justify the cost.