Feb 7 2019
Basis Technologies

How to Calculate CPC: A Guide for Digital Advertisers


As a digital advertiser, you know that PPC advertising is a valuable tool to drive all sorts of marketing goals, such as finding new leads, nurturing prospects, driving conversions, and increasing the lifetime value of your current customers. But in order to be effective and profitable, PPC requires ongoing financial investment, constant analysis and continual adjustments  to ensure maximum ROI.  As part of that recipe, it’s critical to know how to calculate Cost Per Click -- or your maximum CPC -- and to get it right.

The good news for digital advertisers is that CPC is the one factor over which you have the most control. And CPC has the most significant impact on performance. Maximum cost per click affects:

  • Whether your ad shows up in an auction
  • The position of your ad in search results
  • How long your allocated budget might last

So it’s a constant balancing act. Set CPC too low and your ads might not even appear or be seen. Set CPC too high and you can end up grossly overspending for ad space.

When you perform keyword research using Google Ads Keyword Planner, it provides an average CPC bidding range that's needed to appear at the top or bottom of the page for certain keywords.  PPC advertisers can use it as a guide to what they might spend to reach a certain ad position. But to ensure you have efficient PPC campaigns that maximize ROI, it’s essential to calculate maximum Cost Per Click for yourself.

The reason? You run a unique online business and you need specific profit margins to justify your PPC advertising spend and keep your business growing. Relying on Google’s averages to guess the right CPC leads to mediocre results at best, and negative ROI at worst. You need to evaluate your own market and optimize your PPC strategy to truly meet and exceed your business goals. Read on to learn how to calculate maximum CPC for Google Ads.

Step 1: Determine Your Customer Lifetime Value

In order to accurately calculate Cost Per Click, the first thing you need to know is the value of your customers. How much money do your customers spend with your business on average?

When calculating your CLV (customer lifetime value), don’t forget to first determine the real profit you get from your product. So you need to take into consideration taxes, shipping costs, and the overhead expenses for administrative tasks. Your product can have a list price of $99, but your actual profit is more like $50 after you factor in these internal costs. You also need to consider internal costs when calculating your CLV, or you will end up grossly overspending on ad space.

Depending on what kind of product or service you offer, this can be based off of a single purchase or average of purchases over time. For example:

  • You run a car repair business and earn on average $500 from each new customer billing. Your internal costs amount to $150. Customers return to use your service three times on average. Your average lifetime value per acquisition would be ($500 earnings - $150 internal costs) x 3 repeat services = $1050
  • You sell marketing software with a monthly subscription of $30. Your internal costs amount to $10. People stay subscribed for an average of five months. Your average lifetime value per acquisition would be ($30 earnings - $10 expenses) x 5 months subscription = $100.

Because every business has a unique setup and expenses, determining your internal costs is probably the most difficult part of calculating your CLV. But it’s important to include a calculated estimate here, or risk seriously overestimating your CLV. You will use your CLV to help make sure you don’t spend more on advertising than you earn from it.

Step 2: Calculate Your Conversion Rate

The next thing you’ll want to figure out is the average conversion rate on your website. Specifically, of the people who visit your website, what percent convert into paying customers? This will help you determine how many clicks are required for a conversion.

For example, if you get 50 sales for every 1000 website visitors your conversion rate is 50/1000 = 5%.

Your conversion rate is a static number. That said, it can change over time. And you can create and optimize targeted landing pages designed to boost your conversion rate, which impacts your CPC.  

The best way to calculate your conversion rate is with your existing analytics software. You can use Google Analytics Goal Tracking or eCommerce tracking to see your conversion rate based on current data.

If you already have PPC campaigns up and running, check your conversion rates for specific ads, landing pages, and keywords. The only problem with this strategy is targeting branded keywords: people who type your business name into search are already familiar with your brand and more likely to convert as a result. Including conversions from branded queries in your calculation can artificially inflate your average conversion rate. Avoid including branded keywords or find another method to calculate a more balanced conversion rate.

Step 3: Decide on the Right CPC

At this point, you have all the information you need to calculate a CPC that makes you zero profit but incurs zero losses. To be clear, this is not your final CPC. It is a base number you use to decide on the right CPC for your business needs.

Let’s say you calculated your customer lifetime value at $50, and your conversion rate at 1%. Multiplying these numbers together gives you your base CPC: 0.01 x $50 = $0.50

That means you can spend 50 cents per click and spend (on average) the same amount that you earn from sales. Your ROI would be $0.

Of course, this number should not be your maximum CPC. After all, you need to profit! To do this, you’ll want to set your maximum CPC lower than this number, but it needs to be balanced. Set your maximum CPC too low and it limits your ability to drive clicks and conversions from PPC. Because you’re competing for ad space, bidders with a higher CPC will get higher ad positions in search results, which receive significantly more clicks than ads at the bottom of the page. Set your max CPC even lower, and your ads won’t appear in search results at all.

The question for you to answer is how close to your base CPC you should bid to maximize visibility, clicks, conversions and profit. It’s important to remember that your max CPC will never equal your actual CPC. You’re set up to only bid the amount needed to win the auction. So your actual CPC can be lower than your max CPC.

For example, if you set your max CPC as $0.45, your actual CPC could end up being $0.36. With that in mind, you can set your max CPC much closer to your base CPC and still deliver positive results.

The best way to test your market and the bidding landscape is by trying and testing different max CPCs below your base CPC threshold. For example:

  • 65% of base CPC
  • 70% of base CPC
  • 75% of base CPC
  • 80% of base CPC
  • 85% of base CPC
  • 90% of base CPC

Start with one of the percentages in the middle and monitor performance. Then adjust to a higher or lower percentage and see what impact it has (if any) on ad visibility, clicks, and conversions.

Step 4: Optimize and Recalculate

If you want to ensure you that maximize ROI from your PPC campaigns, you should regularly recalculate and optimize your CPC. Google uses a variety of factors to determine actual CPC -- improve these areas and you can potentially reduce the costs needed to reach your advertising goals.

Some areas to optimize and improve include:

Your keyword quality score

Google Ads prioritizes relevance and quality over bid amount, determining these factors by using a metric called Quality Score. The higher your quality score, the less you need to bid to rank for a specific keyword. So pay attention to your quality score and the factors that affect it, such as your landing page and ads.

Your landing pages

As mentioned before, you can create targeted landing pages designed to maximize on-site conversions. Your conversion rate is a huge factor in determining CPC. Improving your landing page conversion rate from 0.5% to 1% can mean moving your base CPC from $0.42 to $0.85. So create different versions of your landing pages using different headlines, copy, supporting media and calls-to-action, and test and discover which elements are the most effective at driving conversions from your PPC traffic.

Your ads

Creating more compelling ads can improve your click-through rate and provide more conversion opportunities. This indicates relevance and can improve your quality score. Because you need to ensure your advertising message is sufficiently relevant to the related keyword, using ad extensions and other strategies to make your ad more prominent can also drive more clicks.

Automated Solutions

Of course, the current state of the market and the bidding landscape can also have a big impact on the max CPC needed. It’s worthwhile and recommended to regularly calculate and adjust your CPC manually. But there’s no way to effectively keep up with the quickly changing markets without relying on automation.

Bid management tools offer a proven strategy to make necessary adjustments to your CPC while reducing wasted ad spend and maximizing ROI. Using data from Google Ads performance and the latest market insights, bid management tools take on the challenging task of ensuring you always set the right CPC. At the end of the day, knowing that you’re on a path to higher ROI frees you up to focus on growing your business, increasing revenue and taking your PPC strategy to new levels.