You actually need to understand the goals of your PPC campaigns
. You need to know how many patrons you want to try to add and how much you can offer to pay to get each new client. If you don't know what a new patron is worth, then that is something you in fact want to find out. Or else, you're shooting in the dark.
As practiced search engine marketers, we have clients asking us to make X sales per day or per month while spending Y dollars. This is a difficult state of affairs because it often means we want to get clicks as cheaply as possible while maintaining a certain level of conversions. The thing that makes this a complicated situation is that as click bids go down, often conversion rates go down as well. One reason is that to make low cost traffic, you often have to use content networks as well as search results, which are less targeted and convert at lower rates.
Nonetheless, to even tackle the problem we want to understand the numbers. Here is a very easy formula to gauge how much you can spend per click on your paid search campaign:
Cost Per Click = Amount You Can offer to Pay Per client * Conversion Rate
OR
Cost Per Click = Average Sale * profit Margin * Conversion Rate
For example, if you make $50 revenue per customer, on average, with a 50% profit margin, then you can afford to pay up to $25 to acquire a new client. You would only break even at that rate, but at least you would add a new client and would have the opportunity to sell more products or services to that customer in the future. Assuming a conversion rate of 1%, then the numbers work out like this:
Cost Per Click = $25.00 * .01 = $.25
OR
Cost Per Click = $50.00 * .50 * .01 = $.25
So you now know that you can offer to pay a quarter per click. If you can double your conversion rate, then you can double your revenue or double your bids.
As you watch your PPC campaign, you might find that certain products sell much better on-line than others. If this is the case, then you might want to re-work your numbers to stress the products that are selling. For example, let's say you have the following products, which are selling via Yahoo! in the following proportions:
Product A - $25 revenue per sale - 50%
Product B - $10 profit per sale - 10%
Product C - $40 revenue per sale - 40%
Then your average revenue per sale is as follows:
($25 * .50) + ($10 * .10) + ($40 * .40) = $12.50 + $1 + $16 = $29.50
Based on these numbers, you know that you can now pay up to about $.30 for clicks.
Or if there is sufficient traffic related to Product C, you might want to start allocating more of your budget for it and less for the other products, since it generates the most profit per sale.
As mentioned earlier, it may even be worth taking a loss on the first sale just to get the customer. If you know the lifetime value of your clients, then you can make this call. If you generally only do business with your customers a single time, then that is another area of your business you want to investigate - how to sell more to people who have already done business with you. This is where you should use vehicles like email, newsletters, blogs, etc. to create a community of patrons who come to rely on you for information. It all comes down to creating a holistic, integrated marketing plan, and it starts with knowing your numbers.
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