How to calculate your Max CPC bids in Google Ads
Many People routinely ask how to determine a Max CPC bid for keywords, ad groups and campaigns without any historic data.
Of course, once you have a good amount of data in the campaigns, this becomes much easier, and there’s a few different ways you can bid on keywords to maintain profitability.
One of the methods is an easy variation of the method I’m going to show you in this post.
But if you have no data, and you’re adding new keywords to a new account, it’s a little trickier to determine the right starting CPC bid.
Because there’s some degree of guesswork here, you’re not going to be able to scientifically choose the precise right bid, but you can get close (and certainly do a whole lot better than pulling a number out of your hat).
You need three key metrics to make this work.
1. Your breakeven or desired ROAS (return on ad spend).
2. Your average order value (AOV).
3. Your predicted conversion rate (PCR).
Desired ROAS is the amount of profit you want to make. Breakeven ROAS is the return on every pound you spend on advertising that doesn’t earn you any profit or cost you anything. Hence “breakeven”.
I recommend calculating your max CPC bid using a breakeven ROAS. If you’re breaking even on a new campaign in Google Ads, you’re doing very well right out of the gate. Additionally, you’ll likely see increased value over time with referrals, repeat purchases etc. So if you break even on the cost of the first click, you’re likely still profitable.
To get our breakeven ROAS, we need to know our profit margins. Margins vary by product, service etc. If you have your ad groups broken out tightly (as you should be), you may be able to use this formula to determine the right default ad group max CPC bid and not need to calculate separate bids for each individual keyword. But this formula can also work at the keyword level.
Let’s say we sell iPhone cases for £20. Say we earn £8 on every sale. That means our profit margins are 40%. (8/20 = .4). In other words for every pound in revenue, we earn 40 pence in profit.
If you’re a drop-shipping company, your profit margin may be lower. If you sell digital goods, or you’re a SaaS business, your margins are likely much higher.
Either way, you need to know your margins!
Once we know our margin, we can determine our breakeven ROAS. You divide 1 by your margin …. Simple!
1/.4 = 2.5.
That means we need to earn £2.50 for every pound spent on advertising to breakeven. This is also called a 250% ROAS.
In English, it takes your company £2.50 in revenue to earn £1 of profit. That £1 is paid to Google for ad clicks, and it’s a wash. That’s how we get to breakeven. By the way, it’s important to be able to explain the logic of these calculations to your clients!
So we now know our breakeven ROAS is 250%. If we’re earning £2 for every pound spent on ads, we’re not profitable. If we earn £2.60 for every pound spent on ads, we’re profitable.
Now we need to figure out our average order value. This should be relatively easy for you to do.
If you have analytics on your site and some historic data, great. But even if you don’t, you can easily figure it out. Again, this may need to be figured out on the ad group or keyword level, depending on how your account is broken out.
For example, if you sell sofas for a range of £1200 – £1500, then you can predict an AOV of £1,350. If you know that 80% of sales are of a certain sofa, then use the cost of that sofa.
Let’s say in our example we sell cases for £20 and most customers also buy a £10 screen protector. So we’ll use an AOV of £30.
Now we need to figure out our predicted conversion rate. This is the only metric that we really need to guess at. If you have analytics and conversion rate data from organic / direct traffic, then that’s a good place for you to start. If your Conv Rate is coming from branded traffic, then calculate a predicted conversion rate of 75% less.
So if your branded conversion rate is 5%, assume a non branded conversion rate of 1.2% or so. I want to pause to point out that Google automated bidding strategies have gotten a lot better and more sophisticated over the years. If you’re properly using Google automated bidding (like Target CPA or Target ROAS), you won’t need to ever calculate these Max CPC bids by hand. And, you should definitely be using Google’s automation (or at least testing it). But, you absolutely should have a basic understanding of these formulas. If you don’t understand how to determine your marketing costs, you’ll never fully be able to understand or appreciate how automated bidding actually works. Also, clients will expect you to know exactly how to run these calculations by hand, even if we are bidding with automation. Back to our main programming …
If you don’t have any conversion rate data whatsoever, try and research what typical conversion rates are for your industry. If you’re an ecommerce business, a PCR may be something like 0.8% to 2%. If you’re a lead-gen business collecting leads through forms, maybe your PCR would be something like 4% – 10%. Conversion rates vary widely, so this is the part you should be conservative with if you can’t get any useful information.
For our example, I’m going to go with a PCR of 2%.
So now we have our three key metrics: Breakeven ROAS: 250% AOV: £30PCR: 2%
Here’s the formula:
(AOV / Breakeven ROAS)*PCR = Max CPC Bid.
Let’s plug it in.
30 / 2.5 = 12
12 * 2% (or 0.0.02) = £0.24
So in our scenario, we need to not pay more than 24 pence per click in order to break even.
Again, that’s assuming our AOV is in fact £30, and our conversion rate is only 2%. If our conversion rate is 4%, we’d be able to pay more per click.
In English, a 2% conversion rate means we get two sales from every 100 clicks. Or 1 sale from every 50 clicks, on average. So if our CPC is £0.24, then we’ll need to spend on average, £12 to generate a sale (.24*50 = 12).
That £12 generated an average of £30 in revenue (£30 AOV).
At a 40% margin, the £30 in revenue generates £12 of profit (30*.4 = £12). We owe that £12 to Google for our 50 clicks and we’ve broken even!
12 divided by 30 is also .4, which is another way of determining margin by looking at profit and average order value (revenue). Now, if you’ve been running your campaigns for some time, and you actually have real conversion rate data, simply use your conversion rate instead of a predicted conversion rate. If your ad groups are segmented well, and conversions are being tracked properly, you’ll be able to use this formula to determine your default ad group Max CPC bids. From there, once you have data at the keyword level, you can adjust individual bids accordingly.
So that’s how you calculate the right CPC bid without any data in the account!
Good luck with your CPC bids. And remember, you should be testing Google’s automated bidding strategies, and you won’t be needing to calculate these bids by hand. But I strongly suggest you learn and memorize the above formula and concepts.
