Sometimes I hear pay-per-click advertising account managers say something like “My CPCs keep going up!” as if that’s a bad thing. Many online marketers mistakenly think that they want the Cost-per-Click (CPC) of their ads to be “as low as possible” and, even when CPCs do go down, still aren’t satisfied and want them to be reduced further.
But since the Cost-per-Acquisition (CPA) of an ad is measured in ‘dollars per conversion’ and the Conversion Rate (CR) is measured in ‘conversions per click’, we can multiply these factors together to determine our target CPC:
That is, if we should be willing to pay $10 per conversion and 20% of clicks result in conversions, then each click is worth $2.00 to us. We can see from the equation above that the only ways to reduce the target CPC to $0 are to have a target CPA of $0 (at which point an advertiser shouldn’t be willing to pay for even one click, which would be very bad for business) or to have a conversion rate of 0% (which would also be very bad for business), or both (which would be very, very bad for business).
Note in the equation above that Quality Score plays no role whatsoever in determining your target CPC. If there is an increase in one’s Quality Score, an account manager should not rejoice at the amount that the Cost-per-Click diminishes, but rather continue to pursue precisely the same target CPC, enjoying whatever increase is seen in the number of clicks.
One interesting thing to observe about the equation above is that any extent to which conversion rate optimization efforts are successful should result in higher target CPCs. For example, if by designing new landing pages we manage to raise our conversion rate from 20% to 50%, then we should be willing to increase our target CPC proportionally from $2.00 to $5.00. That is, one measure of the success of landing page optimization efforts is the degree to which they increase the observed Cost-per-Click.
Looking at the equation above we can clearly see that AdWords account managers who wish to both increase their conversion rate and simultaneously decrease their average Cost-per-Click are pursuing counterposed goals.
A second interesting observation about the equation is that the judicious addition of negative terms to a keyword (in order to eliminate some low-value impressions) should concomitantly result in an increase in the ad’s conversion rate and, thus, increase the advertiser’s target CPC for that keyword.
Finally, it should be noted that the efforts by the search engines themselves to detect click fraud or to improve the relevance of a given ad to a given search query should also naturally result in increasing CPCs to whatever degree these changes enhance conversion rates. So, it should be expected that CPCs would have the tendency to inflate over the timescale of months or years as their algorithms improve.
For those who are unconvinced by theoretical arguments that successful online marketing efforts should tend to increase CPCs, we can also present hard-earned empirical evidence simply by looking at CPAs for various accounts.
For the month of March 2010, the graph below depicts the CPA for all of the non-brand-related keywords for a dating website which has a CPA target of about $100. (Naturally, brand-related terms tend to generate large numbers of conversions at dirt-cheap CPCs, so these terms have been eliminated from consideration for this analysis.) Collectively, these words cost just over $16,000 in March.
We can see from the graph that words whose CPC averaged $2.00 to $2.50 had a CPA less than $70 per conversion while words with an average CPC in the range of $0.00 to $0.50 collectively have a CPA of over $130 per conversion. It might be worthwhile, if the words with CPCs above $2 are limited by the account’s budget, for the manager to consider simply shutting off some words with CPCs below $0.50 in order to free up additional money for the high-CPC ads.
For ROI-based accounts, natural metrics to consider are the Profit per Impression and, of course, the Return on Investment. For one campaign in an ROI account that sells very expensive products, we again filtered out brand-related keywords. The remaining words in that campaign spent over $180,000 in March and the target ROI for this campaign was about 40%.
Again, the highest CPC keywords prove to be the most valuable, with ads whose CPCs averaged $10.00 to $12.00 bringing in an average profit of about $0.25 per impression and ads whose CPCs averaged $0.00 to $2.00 bringing in only about $0.01 in profit per impression. Not only did the lower-CPC keywords average less profit per impression, but they also had lower ROIs than higher-CPC words.
The point I’m making is that every ad occupies a small piece of visual real estate and real estate has value. Good real estate has a high value for a very simple reason – it’s worth it. That’s why you’ll find more Starbucks in downtown Manhattan than, say, the northern coast of Greenland. Low-CPC keywords tend to be low-CPC keywords precisely because they’re not worth much. (To be fair, though, in the course of this analysis I did find some quirky 3- and 4-term keywords that generated a lot of business at very low CPCs. It’s likely only a matter of time, though, before competitors discover them too.)
The take-home here is: Don’t put your ads in Greenland.
So, if your marketing efforts are going well, with improving conversion rates and good negative terms in place and someone asks you how your account is performing, be sure to hold your head high and say “My CPCs keep going up!”