Okay.
Today we're going to be covering a cost per click formula and how to figure out just how
much you can spend in your pay per click accounts.
Stay tuned.
Hi, I'm Mike Mancini... helping you market, simplify, and impact your business.
As a Google ads agency owner, a lot of questions I get are based around cost per click.
How much are they able to spend, how much of they're going to cost?
The questions go out from there, but if you don't understand what cost per click is up
in the upper right hand corner here, there is another one of our videos.
You should probably start there.
That will explain exactly what cost per click is.
If you do understand cost per click, what we need to try to figure out is exactly what
the maximum amount we're willing to pay is a per click.
With that set I, this is absolutely crucial that you listen to this part.
I am willing to pay more than what this will tell me.
If that turns into conversions, there are going to be clicks that are very, very small.
They're going to be clicks that are little bit more expensive.
What you have to understand is over time, as you optimize your campaigns, typically
you will start to bring the cost of those clicks down as they start performing better.
So just because you see a click in your campaign that might be higher than what this number
is that we're going to show you, you need to understand that that can change over time.
But if it's a keyword that converts really well, you need to make sure that you're aware
of that and you take that into account.
So let's take a look at it, a little diagram here.
So right now we're going to try and figure out the maximum cost per click.
What you need to understand is your margins.
Now if you are selling a product and that product is $200 and your margins are 50% you
would be making $100 on that product, right?
If you had a service business and every service call you went out on was worth $200 to your
business, but between gas and insurance and paying your supplies and paying your employees,
if a hundred dollars of that goes towards that service, then out of that $200 you would
be left with $100 we are going to just use a $100 just because it's easier to calculate.
So let's say your margins are $100 now your conversion rate, now an average conversion
rate is probably around 3% so we're just going to stick with that.
So how we're going to figure out our maximum cost per click is we are going to take $100
our margin, and we're going to multiply that by 3% what that comes out to be is $3 so we'd
like our maximum cost per click to be around $3 so how do we know that that's the right
number?
Because if we have 100 customers coming to our website and that 3% of them are converting,
we could take 100 divided by three that ends up equaling 33.3% so what that means is one
out of every 33% of the people that get to our website will actually convert.
So if we take our cot, maximum cost per click by $3 and we multiply that by 33.33% that
ends up being $99.99 cents right?
Under our $100 margin.
If we spend more than that $100 we've actually lost money on this campaign.
So for example, if we spent end up spending $3.25 cents and we multiply it again by that
33.33% we will have ended up spending $108.32 cents if we're only making $100 on that job,
but we spend $108 to get it, we've actually lost $8.32 cents.
So now, depending on the service that you're in, $3 is actually not a lot per click.
I know you may be thinking that that's really expensive, but let's just say that you are
converting at a much better rate.
Let's see, you're converting at 5% that means 100 times 5% ends up being $5 a click.
So when we get down to here, 100 divided by five ends up being 20% we're going to change
this to our $5 click times 20% that ends up being $100 so if you convert better, you can
actually afford to pay more per click.
But let's say that all of a sudden something happens and you're able to increase your margins
to $150 we change a few numbers here, $150 times 5% is actually $7.50 cents and you see
how the numbers work out there.
Now, do we always want to pay $7.50 cents per click?
Absolutely not.
We'd obviously like to pay a lot lower, but this is just a guideline that can help you
figure out what you could possibly afford in your pay per click campaign, but please
also keep in mind certain keywords that you run are going to convert at better than 5%.
Other keywords might be lower.
You need to take that into account.
If I'm using this calculator and I'm seeing $5 or $7.50 cents a click, I might be willing
to pay more per click if that keyword converts better.
Now you obviously don't want to use all of your margins to acquire customers, but this
gives you an idea or a guideline on how much you can possibly spend.
There are a lot of other factors that go into it, but once again, this is just a guideline.
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And if you want to see some more great videos on cost per click or other Google ads over
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Thanks so much.
Again, I hope that helped market, simplify or impact your business.
Hope to see you next time.