The Search For An Optimal AdWords CPC

As we are approaching the end of the year, and the time has come to get into a reflective mood, I wanted to return to a nice little problem I’ve mulled over quite a bit this year: What is the optimal AdWords CPC (cost per click)?

Having been in the SEM game for more than 10 years now, you might be surprised that I’m only just thinking about this question — seems quite important, right?

Truth be told, it’s a question I’ve never really stopped thinking about, as I find it very interesting. (It should be noted at this time that my university dissertation focused on an old algebraic parlor game, which was endlessly fascinating but ultimately useless — thankfully, here we’re in more practical territory.)

To help find the optimal solution, we need to have a clear goal. I feel the most obvious goal to aim for is to maximize the profit of a PPC campaign. Maximizing revenue is fine, but its one-dimensional nature can lead you into trouble. (Remember, “Revenue is vanity, profit is sanity.”)

Let me first try and pique your interest in this problem and its shape-shifting answer, then go on to discuss the journey to finding a better understanding of the answer.

So, What Is The Optimal Bid Price?

A simple answer to a simple question, right?

Let’s look at the most logical way to answer this question, with a simple scenario to get a starting point.

A retailer knows that the conversion rate (CR) on keywords for “Blue Widgets” is 4 percent. He also knows that the average profit per transaction is $90.

Calculating from here means that return on ad spend (ROAS) will be positive for anything below the revenue per click (RPC), which equates to $3.60 (Profit x CR). Let’s look at the dynamic of cost per click (CPC) at different points:

Shock, horror! Increasing the bid leads to negative ROI, whilst decreasing it improves the ROAS. But there we have it — find your break-even point and aim for that as your measured CPC.

But leaving it here would be too easy, and that doesn’t really answer the question at all.

So let’s add a bit more complexity and try and make the situation more realistic and less theoretical. The main issue here is that we are talking about the volume of profit, for which we need to factor in volume of clicks and revenue.

[Read the full article on Search Engine Land.]