3 Strategies to Profit When Click Prices Increase (Part 1 of 3 Series)

Although the degree of increase varies among industry resources, a recent survey conducted by the Search Engine Marketing Professional Organization (SEMPO) indicated an average 26% increase in bid prices in 2004.

Statistics aside, all indications show an upward trend in keyword bid prices which means fewer results in 2005 from the same dollar spent on pay-per-click marketing in 2004.

What Has Caused the Increase?

The simple answer is that pay-per-click marketing has proven to be a tremendous measurable and controllable strategy for generating targeted website visitors among small, medium and large enterprises. As demand for pay-per-click marketing flood the keyword supply of top-tiered pay-per-click search engines and as enterprises compete for top ad placement, the bid prices increase accordingly.

Also, the competitive nature inherent with a bid auction or even with Google Adwords' performance auction structure where a combination of maximum bid and click-through rate calculates your bid price causes an increase in bid prices. Just as with an eBay auction, the bid price increases until either a buyer pulls out of the keyword bidding or backs off from shooting for a top position.

What Do YOU Do When Keyword Bid Prices Increase?

This question will be answered over a series of three articles. Each article will address, in detail, each one of the following three strategies:

1. Understand Your Performance Metrics.

2. Maximize Your Website Conversion. (Part Two)

3. Discover the Lifetime Value of a Customer. (Part Three)

Collectively, these three strategies will assist you in managing your pay-per-click marketing regardless of an ever increasing bid pricing environment.

Understanding Your Performance Metrics – the Foundation

The foundation for managing a performance-based pay-per-click marketing campaign is through understanding your performance metrics. By measuring campaign and keyword performance, you'll know how to effectively handle the dynamics of a competitive bidding marketplace.

What are Performance Metrics?

Performance metrics are measurable results gathered and calculated from your business' online systems or in this case, from your pay-per-click marketing campaign.

Referred to also as "key performance indicators", performance metrics form a dashboard for you to gauge the effectiveness of your pay-per-click marketing. Further, performance metrics help establish a baseline for cost effective bid management supported by your current website performance and your business' financials. As Business Executive, Thomas S. Monson stated,

"Where performance is measured, performance improves. Where performance is measured and reported, the rate of improvement accelerates."

Understanding your performance metrics starts with defining at least one value-oriented action such as an opt-in, subscription, registration or sale that you seek a visitor to perform on your website. This action (or your "marketing objective") is the target for calculating your performance metrics and measuring your campaign's effectiveness.

Performance metrics vary among individual businesses and their unique marketing objectives; however, two specific performance metrics apply to all pay-per-click marketing campaigns regardless of their objectives. These include:

Conversion Rate

Cost per Action

You also need a firm understanding of your business financials and your pay-per-click marketing campaign's unique traffic statistics including:

Average Action Value - The average worth generated from the completion of an action.

Gross Profit Margin - How much you generate on an action, excluding marketing costs.

# of Unique Visitors - Visitors generated from your pay-per-click marketing efforts.

Total Pay-per-Click Cost - Cost to generate the visitors.

Conversion Rate

Google defines a conversion rate as "the number of visitors who took a desired action divided by the total number of visitors in a given time period (typically, per month)." A conversion rate represents your website's ability to turn clicks into actions.

Conversion Rate Calculation: Actions / Total Number of Visitors

For example, if your pay-per-click marketing campaign generated 1,000 visitors to your website and 10 completed your objective (action) then your "conversion rate' is 1.0%.

Cost per Action (also called "CPA")

Your "cost per action" (CPA) measures how much it costs for you to generate an action (marketing objective.) In other words, CPA is the dollar amount you need to spend for your pay-per-click marketing campaign to generate one valuable action.

For example, if $100 in your pay-per-click marketing generated 1,400 visitors and 10 completed your marketing objective, your cost per action is $10.00.

Cost per Action Calculation: Total Pay-per-Click Cost / Total Number of Actions

Once you have figured how much it costs for you to generate one action, you can apply it to the value each action is worth.

Here's an Example...

Imagine you are selling products (product sales is the marketing objective) and your average "sales" value is $100 and your gross profit margin is $65. Historically for every 100 pay-per-click visitors to your website two sales are generated; a sales conversion rate of 2%.

During a particular month, you spend $500 on your pay-per-click campaign. It produces 1,400 visitors at an average cost-per-click of $0.36. Based on your 2% conversion rate, your pay-per-click marketing generated 28 sales. With this data in hand, you can now calculate your CPA.

Cost per Action: Spending of $500 divided by 28 sales = $17.86 per sale.

Discover How to Calculate a Target CPA to Establish a Maximum Bid Price

Using the same example, you can set a maximum bid for your pay-per-click campaign by figuring out what percentage of your gross profit margin you are willing to commit to your pay-per-click marketing budget. Let's assume you commit 30% of our gross profit margin to your pay-per-click marketing campaign.

With a gross profit margin of $65 and a budget commitment of 30%, your target CPA is $19.50.

Target CPA: Gross Profit Margin ($65) times (30%) budget commitment equals $19.50.

Now take your target CPA of $19.50 and multiply it by your current conversion rate of 2% to find your maximum bid price. In this example your maximum bid price is $0.39 per click.

From these calculations, you now know your average maximum bid price across your pay-per-click marketing campaign must be equal to or less than $0.39 per click to produce your target CPA of $19.50.

Performance Metrics take the Risk Out of Your Bidding Decisions.

As Robert Kiyosaki, author of mutliple New York Times best-seller books including Rich Dad Poor Dad states, "being uneducated is risky." By knowing your performance metrics, you can determine the constraints of your bid prices against your financial objectives to ensure the achievement of your business goals.

Performance Metrics Pinpoint Areas of Competitive Advantage

Most importantly, knowing your performance metrics enables you to identify and prioritize marketing strategies and website improvements that directly affect the bid price you can bid while remaining profitable.

As shown in the above example, your website's conversion rate and average sales value has an extraordinary effect on your cost per action. By focusing your efforts on increasing your conversion rate and/or your average sales value, you can bid profitably at higher "per click" amounts.

Competition beware – when your enterprise is armed with the insight gained through performance metrics you are a powerful force regardless of ever increasing keyword bid prices.

Until next time when we dive into maximizing your website conversion rate... start calculating your performance metrics!

Kevin Gold is a Founder of Enhanced Concepts and a published author. If you're interested in increasing your leads or sales, get a free copy of "Understanding Your Conversion Rate" and "12 Surefire Ways to Increase Your Website Conversion" by visiting http://www.enhancedconcepts.com

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