How Much Should I Bid?

Good question, but before you look at these and other optimization strategies to get the most from your advertising dollars, make sure you've taken a long hard look at how effectively your website encourages prospects to buy from you. Is your website a well-oiled conversion machine? Good, now let's look at your pay per click (PPC) advertising.

How can you approach bid setting in a logical way that ties back to your bottom line? How do you know what your upper limit is for any given term or AdGroup? The answer is to calculate the cost per order (CPO) ceiling that keeps you within your budget for advertising as a % of gross revenue. The easiest way to keep track of this is to look at each category, figure out what the true average ticket sale is, what the true blended margin is, and how much profit you need.

Simple Example:

Category X has an average ticket (or average price, if you don't know the
average ticket) of $100.

The margin on average for Category X is
40%, or $40 gross profit per
transaction before marketing
expenses.

If you need to make 20% profit, then you have $20 to
spend on advertising for each order.

Therefore, your CPO ceiling for Category X is $20. If you're spending more than this on a keyword without generating a sale, then you need to cut your bid or eliminate the keyword. If you're using a high-traffic keyword like "furniture" or "digital camera", you'll blow through that in about 3 minutes unless you're bidding a nickel per click. If you have a highly targeted term, you can afford to set your bid high, because these are likely to send a smaller amount of better-qualified prospects to your site.

If you're lucky enough to be selling products that usually convert on the initial click-through, you can just use the CPO calculations provided by nearly all PPC media outlets to gauge whether to raise or lower your bids.

If you can't rely on those numbers, then you need to start looking at ways to track customer interactions that jump from online to phone and back. Why is this so important? Well, what if 80% of your conversions are coming from 20% of your keywords (as is generally the case)? You need to know where to move your bids to get the biggest return on your ad spend.

Is that all there is to it? No, but it's a start.

While you're burying yourself in the mind-numbing detail of trying to optimize your campaigns, don't forget about optimizing your landing pages. In most cases, improving your site's ability to convert browsers to buyers will have a higher ROI than trying to affect conversion from your advertising.