How do I calculate if it makes financial sense to compete for a keyword?

The short answer is that you need to compare your potential earnings per conversion against the cost per click (CPC) for that keyword. By calculating your average ticket, conversion rate, and cost per click, you can determine if competing for a specific keyword is financially viable or if it might result in losses.

Full Explanation

To figure out whether bidding on a particular keyword makes financial sense, start by understanding three key metrics: the average ticket (or average revenue per sale), your website’s conversion rate, and the cost per click for that keyword.

Your average ticket is how much revenue you typically earn from a single sale. The conversion rate shows the percentage of visitors who complete a purchase after clicking an ad or visiting your site.

Multiply your average ticket by your conversion rate to estimate the average revenue generated per click. Then compare this value to the cost per click: if your revenue per click is higher than your CPC, it might be profitable to compete. If not, you risk spending more to get clicks than you earn from resulting sales.

Step-by-Step Breakdown

Calculate your average ticket: Determine the average amount of money you make from one sale. For example, this might be $500.
Determine your conversion rate: Find out what percentage of visitors actually convert into customers. For example, 80% conversion means 80 out of 100 visitors buy something.
Calculate average revenue per click: Multiply the average ticket by conversion rate. Using the example numbers: $500 x 80% = $400.
Find out the cost per click: Check the average CPC for the keyword you want to compete for, for instance, $50.
Compare revenue per click and CPC: Subtract CPC from average revenue per click. Continuing the example, $400 – $50 = $350 profit per click. This means competing is currently profitable.
Adjust your bid based on average CPC and quality score: If the average click costs $160, competing at that price might not be profitable. You should set a bidding limit to avoid overspending. Keep in mind that your quality score affects your actual CPC; a higher quality score may lower your bid cost while maintaining good ad placement.

Real Examples

Consider a scenario where your average ticket is $500, and your conversion rate is 80%. This means one click on your ad is expected to generate around $400 in revenue.

If the cost per click is only $50, you are essentially spending $50 to earn $400, which is a solid return on investment. However, if the average CPC climbs to $160, you would pay $160 to earn $400, reducing your profit significantly and potentially making the campaign unprofitable.

Common Mistakes

Ignoring quality score: Assuming costs will be the same regardless of your ad quality can lead to overbidding or wasted budget.
Failing to calculate conversion rate accurately: Overestimating conversion rates can create a false sense of profitability.
Not setting bidding limits: Bid wars can drive CPC up beyond profitability, so it’s important to cap your maximum bid.
Overlooking revenue per click: Focusing only on CPC without considering what each click can bring may lead to poor decision making.

FAQs

What is quality score and why does it matter?

Quality score is a rating Google assigns to your ads based on their relevance and performance. A high quality score can reduce your actual cost per click, making bidding more cost-effective.

How do I know my conversion rate?

You can calculate conversion rate by dividing the number of completed sales by the total number of visitors from your ads, then multiplying by 100 to get a percentage.

Should I always avoid keywords with high CPC?

Not necessarily. High CPC keywords might still be profitable if your conversion rate and average ticket justify the cost. Always calculate to be sure.

Key Takeaways

Always calculate your average ticket, conversion rate, and CPC before competing for a keyword.
Compare revenue per click to cost per click to assess if bidding is profitable.
Set limits on your bids to avoid overspending, especially when CPC is high.
Improve your quality score to lower your actual CPC and increase bidding efficiency.