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How to Determine Cost Per Click (CPC) for Ads

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How do you determine the cost per click (CPC) for your ads?

One of the most frequently asked questions. In general, you need to understand how much money you have ...

"And yet," you ask...

This article will give you the answer.

For you to understand, it will not be possible to determine this quite accurately, because. Every business has its own nuances. So in advance we take the right to an error.

In this article, we'll take a look at how you can determine the cost per click of your online ad campaigns and beyond.

ROI (return on investment) formula

You are in business to make money. To do this, you need to make sure that the money you invest creates positive cash flow.

To understand how this happens, you will need to calculate the ROI (return on investment).

Simply put, ROI answers the question, “Am I making more money than I put into my business?”

Beyond that, ROI will also tell you the amount of positive (or negative) return on investment. That is, how much money you make (or lose) in relation to your investment.

Let's look at an example.

Let's say you buy $1,000 worth of shares. Two months later, you sell the same shares of stock for $1,300.

What was your return on investment?

Here is the ROI formula:

ROI=(profit - cost)/amount of investment*100%

Now with numbers. The return on investment is $1,300 (share sale) and the investment value is $1,000 (share cost).

ROI = ($1300 - $1000) / $1000 = 0.3 or 30%

Got 30%. This is because ROI is always measured as a percentage.

If the return on investment is positive (as in this case), then the investment is profitable. Because you get more money than you put in.

If the return on investment is negative, then the investment is not profitable.

Let's look at an example of a negative ROI.

Let's say you buy shares of stock for $1,000. And forced to sell them for $700.

ROI = (700 - $1000) / 1000 = -0.3 or -30%.

You spent 30% on this investment.

It's important to keep the ROI formula in mind when you're calculating cost per click.

CPC

Many platforms where you can advertise follow this model. This means that you only get paid for someone clicking on your ad.

And if your ad appears a million times and no one clicks on it, then you pay nothing. Of course, this is a signal that you need to work on the quality of your ad..

By the way, CPC is one of the reasons online advertising is so attractive. You only pay for your ad when potential clients click on it and study your offer.

How much is each click worth? Differently.

The rate depends on the demand. The more people who want to bid for a particular keyword, the higher the cost per click.

It all depends on the current demand and the popularity of the keywords you are targeting.

What is your conversion rate?

Then you need to understand what your conversion rate is. This is the percentage of people who click on your ad and make a purchase..

Unfortunately, not everyone who clicks on your ad will buy your product or service.

This means that cost per click is not the same as cost per sale.

Example.

Let's say you're selling shoes, the ad cost is $1.25 per click. It would seem that this is an affordable price to pay per click, because you already have a profit margin of $17 for every pair of shoes you sell.

Not always.

You need to take a look at conversion rate. If only one out of every ten people who click on your ad buys shoes, then you are really paying $12.50 (1.25 x 10) per sale.

Now calculate again. It's $17 - $12.50. This leaves you with a smaller profit of $4.50.

Can you afford it?

This is a question that you will have to answer for yourself.

Your Conversion rate and cost per click are directly related to your return on investment (ROI).

Google AdWords Average CPC by Industry

It is also important to understand that AdWords offers both search (contextual) advertising and display network advertising (banners).

The average cost per click across all areas is $2.32 per contextual advertising and $0.58 for display (banners).

Let's take a look at the industry averages for Google AdWords cost per click.

Lawyer services - $1.72 (contextual) and $0.32 (banners)

Auto - $1.43 (contextual) and $0.39 (banners)

B2B - $1.64 (search) and $0.37 (banners)

Consumer Services - $3.77 (contextual) and $0.69 (banners)

Dating sites - $ 0.19 (contextual) and $ 0.18 (banners)

E-commerce - $.88 (search) and $0.29 (banners)

Education - $1.74 (contextual) and $0.40 (banners)

Employment services - $0.20 (contextual) and $1.66 (banners)

Finance & Insurance - $3.72 (contextual) and $0.72 (banners)

Health and Medicine - $3.17 (contextual) and $0.70 (banners)

Products – $3.19 (contextual) and $0.70 (banners)

Industrial Services - $2.00 (contextual) and $0.60 (banners)

Right - $5.88 (contextual) and $0.60 (banners)

Real Estate – $1.81 (contextual) and $0.88 (banners)

Tech – $1.78 (search) and $0.20 (banners)

Travel & Hospitality - $1.55 (contextual) and $0.24 (banners)

Display ads tend to cost a lot less than search ads. Why is this?

This is because search ads can be used for people when they are on the verge of making a purchase. So the price is higher.

For example if you're selling cameras, you'll probably want to run an ad for keyword"cheap cameras"

For what? Because anyone looking for "cheap cameras" is almost certainly interested in making a purchase.

On the other hand, display ads (banners) appear when people view a page and are not necessarily interested in buying right away.

It often happens that display ads are used for retargeting (or for people who have already interacted with the brand).

Average cost per click on Facebook by industry

Another great option when it comes to online advertising is Facebook. This is because you can target ads to people based on demographics and interests.

The average cost per click on Facebook is $1.72.

Often, when bidding - cost per click, people are guided by intuition. This also applies to setting the cost of a click in Yandex Direct, and in Google Adwords, and in general in any advertising system.

This results in a dialogue like this:

— We can pay no more than 30 rubles per click.
- Why 30 rubles? Why not 130?
— I don't know, I think it's a normal price.

To calculate the cost per click, you need the following initial parameters:

With such calculations, we always lean for the worse - we use a slightly higher level of costs or a slightly lower expected number of sales.

• Net profit from one order, as the difference between the cost price and the price of the goods. When calculating this indicator, take into account refusals and returns on orders.
• The conversion of the site under study is the ratio of visitors who made a purchase to the total number of site visitors.
  If this value is not yet known, then you can look for average statistical indicators for your industry, for example, for an online store 2%, for a landing page 4%. It should be borne in mind that the error here can greatly affect the result.

The formula for calculating the cost of a click:

Let's take a look at an example:

• Net profit from one order is 250 rubles
• Store Conversion - 1.5%

We calculate the cost per click using the formula:

CPC = Net Profit * Conversion / 100.

Therefore, we get: CPC = 250 * 1.5 / 100 = 3 rubles 75 kopecks.

This is the maximum allowable cost per click, at which your profitability will be 0%. Reduce your cost per click by N percent. These percentages will be your estimated profit.

At this price, there will be no traffic ...

The question may arise, what to do with such a click price, because there will be no traffic, for example, to Yandex Direct, with such a rate?

• Increase profitability
  You can increase the markup on goods, change the assortment, reduce costs, and so on.
• Upsells
  Resell on the site and by phone when confirming the order. In fact, this is one of the ways to increase profitability.
• Increase website conversion
  Work on the interface, test widgets, provide customer support, offer goods at a good price…
• Find cheap or free traffic, at which the specified conversion value will be saved.
• Don't forget customers who have already bought. Or not bought. Make repeat sales, use E-mail newsletters, call and remind about yourself. In general, work with the client base.

An important point. The cost per click is calculated for each advertising channel and for each tool within the advertising channel separately. Because the site conversion for the Yandex Direct search campaign, for advertising network Yandex Direct YAN,

When planning to organize contextual or display advertising on the Internet, advertisers provide a certain budget for these companies. Hence, they want to see where their money is being spent.
Even more important for an advertiser is to understand how best to invest in an advertising campaign so that it is as effective as possible, money is spent economically, and users are attracted to the site to the maximum.
To understand the reports on the conducted advertising campaigns, as well as their planning, there are such parameters for measuring advertising strategies as CPM, CTR and CPC indicators.
CPM and CPC are professional terms for pricing models, payment options for online advertising. CTR is an indicator of the effectiveness of advertising on the Internet.

What is CPM?

ads. That is, exactly how much money the advertiser will pay to the owner of the site where the banner or ad is supposed to be placed in order for the advertisement to be shown to the target audience 1,000 times.
Features of the CPM-indicator:

• Each impression is counted and summarized. Whether the user wants to click on the ad and follow the link to the advertiser's site - there are no guarantees.
• When you pay for impressions, clicks are free.
• Possibility of displaying advertising exclusively in front of the target audience, having previously studied the attendance of the site. If the platform site assumes the possibility of collecting data about visitors (for example, gender, age, profession, geography at the time of registration), then the employer can set parameters according to which his advertisement will be shown only to the most promising visitors from his point of view. This means that the budget will be spent more rationally.
• When choosing a payment method for impressions, you should take into account the activity of the audience on the donor site. The more active users are, the more often the same ad is shown to them, therefore, money is spent faster, and the reach of “viewers” ​​is smaller.

What is CPS?

CPC ("cost per click") is the cost of each click on an advertisement along with the subsequent transition of the user to the advertiser's website.
Features of the CPC indicator:

• in 90%, really interested users click on the ad block. And this means that paying for clicks allows you to get a more loyal audience.
• when paying for each visit of users to the site, there is always a risk of abuse of this opportunity (for example, empty “clicking” of the budget by competitors). Most donor sites protect advertisers' money from such cases (they block funds if the same user is too "interested" in advertising), but no one has yet managed to solve the problem of idle curiosity.
• when paying per click, donor sites provide statistical information about each user who clicked on an advertising link. Thus, the advertiser has the opportunity to understand which audience is interested in his advertising. Of course, statistical data is limited only to the information that each user has left about himself on the site.

What is CTR?

CTR ("click-through ratio" or "click through rate") is the percentage of the total number of clicks by users of the donor site on advertisements, banners, teasers or text links, to the number of their impressions. The higher this indicator, the more promising the platform for advertising.
CTR is an assessment of the effectiveness of an advertising campaign as a whole, each donor site and each advertisement separately.
Knowing the CTR of each individual advertising platform (what users do there more often - they watch or click), you can calculate the costs, draw up a preliminary advertising estimate and decide on a pricing model.

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