26th Post

That last post was too complicated.

Let me simplify it.

Definitions
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ROI = 50% - The return I need to be profitable across the entire campaign
CTR = Conversion from a click into a Sale
CPC = Cost per click
Profit = How much I make on each sale
SALES = total sales
COST = Total Cost
TRAFFIC = Total Number of Clicks

TARGETCLICKS = My target clicks for sales for a keyword at a CPC price.

Some formulas
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ROI = (SALES - COST)/COST

SALES = (CTR*TRAFFIC*PROFIT)
COST = (CPC*TRAFFIC)

TARGETCLICKS = CTR*TRAFFIC

Doing some substitution

ROI = (CTR*TRAFFIC*PROFIT - CPC*TRAFFIC)/CPC*TRAFFIC
CPC*TRAFFIC*ROI = CTR*TRAFFIC*PROFIT - CPC*TRAFFIC

Remove common terms

CPC*ROI = CTR*PROFIT - CPC

To solve for CTR
CTR*PROFIT = CPC*ROI - CPC

CTR = (CPC*ROI - CPC)/PROFIT

Using this formula - we can find the CTR I need to achieve a specific ROI for a specific CPC.

Let's substitute for
.10 CPC
.25 CPC
.50 CPC

(.10*.5 - .1)/15.00 = .043 = or 4.3% CTR
(.25*.5 - .25)/15.00 = .108 = or 10.8% CTR
(.50*.5 - .5)/15.00 = .2166 = or 21.6% CTR

Now I can even calculate when I must get my first sale at each CPC price point. If I don't get the sale - then I need to drop my price - because I will never be profitable.

As I get more data - then I can keep adjusting my prices. Eventually I will get to a profitable price point for each keyword.

For a 21.6% CTR:

SaleCLICKS = CTR*TRAFFIC

1 = CTR*TRAFFIC

So how much traffic is needed to get me 1 profitable click?

1 = .216*TRAFFIC

TRAFFIC = 1/.216 = 4.6 - since we can't have a partial click = 5

Therefore at $1.00 CPC I need a sale after 5 clicks. If I haven't received the sale - the price MUST drop to something that is profitable at 6 clicks.

And that's how to keep adjusting the prices.

However, there is a problem - the price you are willing to pay may not get you to play. AND it takes a while for Adwords to adjust your campaign and pricing fluctuates based on what other people do.

So - I am waiting to the number of clicks reaches 10 for a keyword before I adjust the prices.

This is why it takes so much time and $$ before you can get profitable.

So for a product which generate $15.00 in profit here are the maximum number of clicks you can get before making a sale for different CPC prices at a 75% profit margin.

CPC Max CTR needed
Clicks For profit goal
$0.10 97 1.03%
$0.15 65 1.55%
$0.20 48 2.06%
$0.25 39 2.58%
$0.30 32 3.09%
$0.35 28 3.61%
$0.40 24 4.12%
$0.45 22 4.64%
$0.50 19 5.16%
$0.55 18 5.67%
$0.60 16 6.19%
$0.65 15 6.70%
$0.70 14 7.22%
$0.75 13 7.73%
$0.80 12 8.25%
$0.85 11 8.77%
$0.90 11 9.28%
$0.95 10 9.80%
$1.00 10 10.31%
$1.05 9 10.83%
$1.10 9 11.34%

I think this is real REAL important - because it doesn't make sense to be paying for keywords that are not profitable and can never be profitable.

DON'T MIX UP CTR for sales with CTR for impressions. CTR in the adwords is showing conversion from IMPRESSIONS not conversions from CLICKS. BIG BIG DIFFERENCE.

THE CTR from impressions is doesn't fit into this scenario.
The CTR from impressions tells you how good your ads are doing.

Not how much you should be paying.

(Yes - I did make that mistake - I got caught up in my own thinking)