There are lots of businesses that could benefit enormously if they were to implement a Google Ads campaign, but many do not because of concerns they have. One of those concerns is not knowing whether or not they could afford to bid on the keywords that they wish to target. Given that within any single business niche there could be hundreds of possible keywords all with varying costs per click (CPC) then the level of uncertainty can be high.
We are not here to criticize business owners for their uncertainty over whether they can afford to bid and that stopping them from proceeding with a Google Ads campaign. After all, it would be foolish to plough ahead into the unknown in any element of your business if you were not aware of what the costs are going to be. However, what we can do is give you a simple formula that you can apply to every keyword and establish if it is affordable for you.
To begin the analysis there are 4 specific numbers or pieces of data that you need. These are:
- Profit Per Sale ($) e.g. $350
- Profit Margin As A Decimal e.g. 30% Profit Margin = 0.3
- Website Conversion Rate As A Percentage Converted To A Decimal e.g. 1 In 100 = 1% = 0.01
- Estimated Cost Per Click Of Each Target Keyword As Per Google Keyword Planner e.g. $4.75
The term we use for the figure that this formula will generate is Maximum Cost Per Click or Max CPC. This will be the maximum amount you will be able to bid on for a keyword. This will be compared to the estimated keyword CPC (Est’d CPC) to determine if you can afford to bid on that keyword. From that, it follows that if your Max CPC is $4, and the Est’d CPC is $3.50 you can afford to build. Alternatively, a $7 Est’d CPC, means you cannot.
Before we go further, you need to understand that some of these numbers can vary in time. For example, if your cost of goods reduces it could mean the profit per sale figure increases. In addition, there will also be scope for you to alter these in your calculations if you wish to experiment. An example might be seeing the difference in your maximum CPC if you increase your profit margins from 50% to 60%.
The beauty of the calculations you will be using is that it gives you the flexibility to assess different scenarios depending on how your business and its website are performing. It also allows you to make adjustments in your Goggle Ads campaigns’ bids, based on the performance of your business and the profits and profit margins it is achieving.
As for the formula to calculate if you can afford to bid on a specific keyword here it is:
(Profit Per Sale) x (1 – Profit Margin) x (Website Conversion Rate) = Maximum CPC
To make it clearer here is the formula with some real numbers
Profit Per Sale = $300
Profit Margin = 20% (0.2)
Website Conversion Rate = 2% *(0.02)
300 x (1 – 0.2) x 0.02 = $4.80
Based on this calculation it means your maximum bid can be as high as $4.80. Now, all you need to do now is check what the estimated cost per click is for any keyword you wish to target and compare it to this number.