| What Am I Bidding For? |
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| Blog | |
| Written by Daryl Michalik | |
| Wednesday, 29 October 2008 | |
 Once you’ve established a decent Google AdWords quality score, and set your daily budget and ad scheduling to maximize ROI, the next step is to determine your maximum cost per conversion. As discussed in an earlier post, initially you care about bidding high to achieve a high position. But once you’ve achieved this, unless the goal of your campaign is awareness,...
Generally speaking, revenue per click does not vary depending on position. However, cost does decrease as position decreases, and that cost fluctuates over time. So if you focus on a position and cost per position fluctuates, you could be losing money if the cost spikes high, or you could be missing out on profitable traffic if the cost drops. Profit can be a difficult key performance indicator to calculate, while the simplest KPI is cost per conversion. Your maximum cost per conversion should be based on your average gross profit per conversion. To establish your maximum cost per conversion, increase bids until you hit that gross profit ceiling. Here is an example: suppose you earn an average revenue of $40 per conversion, at a 25% gross margin or $10 gross profit. Increase your maximum bid until your cost per conversion hits $10. Another way of looking at the numbers is, suppose you generate an average revenue of $4 for a specific group of keywords. If you generally get 25% gross margin on that revenue, you can afford $1 per click of marketing costs. In this case you would set your maximum bid at $1. Even in these tough economic times, don’t be surprised if you actually get more budget to work with. Some companies do have explicit policies which allow more budget for proven profitable opportunities. Take the time to optimize your search marketing spend and not only will your profits increase, but your budget might too. ### Related Resources:
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