How to know what to bid on Google AdWords

Being in position 1-4 for the duration of the Discovery Campaign is important for determining which ad variation delivers the best return on investment.

But it's not necessarily all that important when it comes to determining the best return on investment for individual keywords. You might find that you get a better return on your investment from showing in position number 6 for keyword X than you do showing in position number 1 which results in more clicks at a higher cost but the same conversion rate of visitors into paying customers.

So how do you determine what you should be paying?

The answer is to be found in the cost of a conversion, your gross profit margins and your required return on investment.

Applying Google's tracking code is very important because you get to find out your cost per lead. It's not a precise guide, as some customers who found your website through your advertising will phone you instead of contacting you through your website, but it will help greatly in refining your campaign.

Let's assume your cost per conversion (lead) is $10 and your gross profit per average customer over their lifetime is $100.

Let's also assume you convert 1 in 3 enquiries into customers. This means that for every $30 you spend at Google to attract visitors to your site, you get 3 enquiries and 1 new customer who is worth $100 in gross profit over their lifetime. Your return on investment is

$100 - $30 = $70 return $70/$30 = 2.3 or a 230% return on investment

If your required return on investment is 100%, meaning that for every dollar you spend you require $1 back to cover costs and $1 in profit then you are achieving more than double the required rate of return in this scenario.

(Note: Your required return on investment should represent the best return you can get from any form of marketing – because if AdWords isn’t outperforming other marketing avenues, why wouldn’t you just put more money into those?)

In fact, in this scenario, to achieve your required return on investment of 100% you are able to spend anywhere up to $50 to land 1 new customer.

$100 - $50 = $50 return $50/$50 = 1 or a 100% return on investment

So you should spend up to the amount of money that sees 1 new customer delivered to your business who will, on average, generate the required return on investment.

If you are generating more than the required return on investment from a particular keyword and you are located in position 5, you should consider increasing your bid to increase the likelihood of clicks and conversions. If your ratio of leads to customers holds the same, then you will still achieve the required return on investment, but the absolute value of your profit will be higher.

Summary: what you need to do

1. Work out your average profit per customer lifetime. Failing that, work out what your gross profit per customer was in the last 12 months. If you use a programme like MYOB you can simply take your gross profit and divide it by the number of clients you issued an invoice to in the last 12 months – this is a sufficient approximation.
2. Apply Google’s tracking code to your campaign to work out your cost per lead (we can take care of that for you).
3. Work out your conversion rate of leads to customers. How many enquiries does it take to nail one paying customer?
4. Then apply the maths to each keyword. If you can spend up to $50 to make a sale and keyword A is currently priced at $1.20 and delivering a cost per lead of $10 which converts at 33% ($30 per new customer) then you can afford to raise that keyword’s bid price to $1.99 (1.6 x $1.20 which is the same ratio as $50/$30) before it starts to deliver back less than the required rate of return.

And of course, in a higher position it may achieve more clicks which lead to more conversions and help to lower the cost per conversion which means you could potentially spend even more on it while still earning back what you need.

Use our calculator to work out what you should be bidding at Google, or talk to us about how we can help you achieve better results.