CPC

Cost-per-click (CPC): Definition

Cost-per-click (CPC) bidding means that you pay for each click on your ads. For CPC bidding campaigns, you set a maximum cost-per-click bid – or simply “max. CPC” – that’s the highest amount that you’re willing to pay for a click on your ad (unless you’re setting bid adjustments, or using Enhanced CPC).

• Your max. CPC is the most you’ll typically be charged for a click, but you’ll often be charged less — sometimes much less. That final amount you’re charged for a click is called your actual CPC.
• If you enter a max. CPC bid and someone clicks your ad, that click won’t cost you more than the maximum CPC bid amount that you set.
• You’ll choose between manual bidding (you choose your bid amounts) and automatic bidding (let Google set bids to try to get the most clicks within your budget).
• CPC pricing is sometimes known as pay-per-click (PPC).

How to calculate CPC

CPC means “cost per click”, so the formula for it is as follows: CPC = total_cost / number_of_clicks.

You may also calculate it from CPM and CTR: CPC = (CPM / 1000) / (CTR / 100) = 0.1 * CPM / CTR.

When buying CPC ads placement in a real-time bidding auction, special algorithms look at many variables and will submit a CPM bid in an attempt to drive towards a specific CPC. Some factors include the ads performance so far, what is known about the user, and historic CPMs for the ad placement. All of this information is taken into account as the algorithms try to predict CPM and CPC for every impression. 

How might an advertiser compare, over time, two campaign metrics such as “cost per conversion” and “cost”? 

Search the account for keywords with high average cost-per-click (CPC) bids. Run an impression share report and select to display the two metrics. Filter all keywords with an average position greater than three. Select the two metrics in “Graph options” on the Campaigns tab.

Explanation: You can compare two metrics using the drop-down menus just above the graph on the left. Click each drop-down menu and select the metric you’re interested in. For example, if you wanted to gauge the effectiveness of a particular keyword, you could choose to view impressions and clicks at the same time.

Determining Your Target ROI

Your ideal cost-per-click will be determined by your target ROI, or return-on-investment. For most businesses, a 5:1 revenue-to-ad ratio is considered acceptable. This means for every dollar spent in advertising, five dollars in revenue is produced. A 20% cost-per-acquisition, or CPA, is another way of expressing this ratio.

Bonus resource: If a 5:1 revenue to ad spend ratio is too expensive, use these methods to cross sell existing customers online. This will increase average customer value, which in turn increases how much you can spend to acquire a new customer. 

How Price Impacts Cost-Per-Click

For those advertising on search engines, the product or service being advertised is the single greatest contributor to cost-per-click.

Most online ad platforms are auction based. Advertisers determine how much they’re willing to pay for each click, and those who are willing to pay more get their ads placed higher on the page or are more likely to be shown in a newsfeed.

The more expensive your product or service, the more your competitors are willing to pay for the click. For example, if you sell a $20,000 product, and your website and sales team can convert one out of every 200 ad clicks into a sale (a .5% conversion rate), you should be willing to pay $20 per click on your ad. This results in paying $4,000 in ad costs to acquire a $20,000 sale (there’s that 5:1 ratio mentioned earlier). 

Companies selling less expensive products cannot afford such expensive advertising costs. For example, if your product sells for $200, and you convert one out of every fifty ad clicks into a sale, you should target a CPC of $.80. Fifty clicks at $.80 each generates one sale worth $200, so your $40 investment would have achieved the 5:1 ratio.

To help calculate your target cost-per-click, use the following formula:

Target Cost Per Click = (Revenue Generated per Sale x Your Website Conversion Rate) x 20%

The following chart shows several scenarios for determining your target cost-per-click, taking into account revenue per sale and your website’s conversion rate. 

Targeting Cost-Per-Click For B2B Lead Generation

Most websites, especially B2B websites, don’t sell directly online. Instead, they provide a form, application, or phone number for visitors to fill out, which then feeds to a sales team. To calculate your target cost-per-click under this scenario, you simply need to factor in your internal close rate to the formula above (or the rate your sales team turns website leads into new customers).

Target Cost-Per-Click = (Revenue Generated per Sale x Lead Generation Rate x Internal Close Rate) x 20%

The chart below assumes a 40% average close rate. In other words, your sales team is able to turn four out of every ten leads produced on your site into new business.

Lifetime Value Increases Your Target CPC and CPA

Lifetime value considers the full value of a customer over their entire life. To calculate this value, you must consider how much business they’ll refer to you and any repeat business that may occur. This increases their value beyond their first purchase, and thus increases the amount you’re willing to pay to acquire them.

A high customer lifetime value may justify a very high CPA on their first purchase. Some businesses may be willing to break even or sell at a loss during the first transaction. If you’re going to advertise with these tight margins initially, be confident in your calculation for lifetime value.

In summary, a good cost-per-click is determined by your target ROI. For most businesses, a 20% cost-per-acquisition, or 5:1 ratio of revenue to ad cost, would be acceptable. From there, use the formulas provided above to determine the target cost-per-click for your advertising campaigns.