How to Calculate Your Break-Even CPC?
There are many ways to determine what CPC amount to set for your campaigns, you can figure this out based on your targets, what you know about your business or the value of your sales. In this article, we will go through two approaches to calculating your ideal CPC. Whether you have a target cost per acquisition (CPA) or a return on investment target (ROI), you need to know the CPC value to break even, otherwise, your cost will out-weight your profit and you make an overall loss.
We are not going to jump directly to the final formula to calculate your break-even CPC, however, we will first explain the logic behind an how to solve this on your own, so let’s start first with the first approach:-
Target CPA
To figure out the break-even CPC based on your target CPA, you need to know two things first:-
# Your target CPA which is how much you are willing to pay for a conversion.
# The Conversion rate of your website and this is basically how many sessions or clicks you need to have to generate a conversion.
So, If you know how much a conversion is worth to you and how many clicks it takes to make a conversion, we can then figure out the CPC value to break even. For example, let’s say your target CPA is $75 and your conversion rate is 0.60%, so how much you should bid to break even? Let’s try to figure out the formula on our own:-
As you already know your target CPA equals your cost divided by conversions:
CPA = Cost / Conversion
Your cost is defined by the volume of clicks multiplied by your CPC. And your conversions are just the conversion rate multiplied by your clicks. Let’s substitute this in the below equation:-
CPA = (Clicks * CPC) / (Clicks * Conversion Rate)
Let’s make this equation simpler, by removing clicks from both the numerator and the denominator:-
CPA = CPC / Conversion Rate
let’s arrange our formula to know what our CPC would be:
CPC = CPA * Conversion Rate
The final formula to calculate your CPC is to multiply your target CPA by your conversion rate, so let’s apply this to our previous example. How much should I bid if my target CPA is $75 and my conversion rate is 0.60%? So for this example it would be: CPC = $75 * 0.60% = $0.45
Target ROI
To decide how much you should bid based on an ROI target, you need few things before we start:-
# Your target ROI which is your return on ad spend.
# Conversion rate of your website and this is basically how many sessions or clicks you need to have to generate a conversion.
# Average order value which is the average value of your conversions.
If you know your target ROI, how many clicks it takes to make a conversion and the average order value of your conversion, we can easily figure out the CPC value. Let’s say your target ROI is 2, AOV is $150 and your conversion rate is 0.60%. So, how much should I bid to break even? Let’s find out the formula on our own as we did above:-
As you already know, you ROI is your revenue divided by your cost:-
ROI = Revenue / Cost
Revenue is defined by your conversions multiplied by your AOV. And the cost is the result of your clicks multiplied by your CPC. Let’s replace these in our equation:-
ROI = (Conversions * AOV) / (Clicks * CPC)
Also, your conversions are the clicks multiplied by conversion rate:-
ROI = (Clicks * Conversion Rate * AOV) / (Clicks * CPC)
Let’s simply the equation by removing out the clicks from both numerator and the denominator:
ROI = (Conversion Rate * AOV) / CPC
let’s arrange our formula to know what our CPC would be:
CPC = (Conversion Rate * AOV) / ROI
Finally, to calculate your CPC, you divide your conversion rate multiplied by AOV by your target ROI. To apply this on our previous example:- CPC = (0.60% * 150) / 2 = $0.45
Conclusion
You can’t control how much other advertisers bid but you can place your ads at a level where they will be profitable. The factors which could be holding back profitably possibly include the conversion rate of your website, your conversion value or even the quality score. Therefore, you should be smart in determining which bid strategies to go for, in order to be profitable and successful in setting your AdWords campaigns.
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