Ask Melvin Ng

Bidding to make a profit on Google Adwords might not seem as obvious as the experts tell you. In their 5 minute videos, they’ll show you some quick technique to figure out how much to bid and for what keywords.

You’ll walk away thinking you understand the process. And then something strange will happen: you’ll be absolutely unable to implement their suggestions. No matter what you try, you’ll struggle to break even with your campaigns.

So why is this? Why can’t you experience the success that the experts suggest is completely within your reach? One common culprit is inept bid-setting. Many people who are new to Adwords do not know how to calculate profitable bid amounts. In fact, it is quite simple, but you have to work through it carefully. Here’s a step-by-step process for doing it:

1. Based on past selling experience, determine a rough conversion rate for the product you are selling. For instance, if you can usually convert 4 people out of every 100 who land on your salespage, then you have a conversion rate of 4%. Even if you cannot estimate this perfectly, try to come up with some rough measure before moving on to the next step.

1. Now that you’ve determined your conversion rate, you now need to calculate how much you profit per sale. Don’t get lazy here. If you sell an affiliate product and make a 50% commission, you might be tempted to simply multiply the price by ½. In reality, if you’re using Clickbank or Paypal, they will extract a fee, so you’re not earning 50% per sale. You need to calculate this, too.

1. Next, take the profit per sale and multiply that number by your conversion rate. If, for instance, your conversion rate is 4% and your profit per sale is $50, then you would multiply 50 by .04 and get $2. This means that the maximum amount of money you can afford to spend (if your conversion rate is 4%) is $2 per bid – your break-even point. Spend more than that and you’re actually losing money.

The most important thing to observe here, however, is the relationship between all of the variables.

For instance, think about what increasing your conversion rate means. It means that you would either profit more (without changing anything else) or it means that you could increase the amount you could pay per bid without exceeding your break-even point.

I.e. if you cannot break into profit with your current conversion rate, you may have to improve your sales page.

Additionally, if you increase the price of your product (and it doesn’t decrease conversions significantly), then you can afford to bid more without exceeding your break-even point.

In addition to simply setting prices below your break-even point, you will eventually want to refine your bids so that you are deriving the greatest amount of profit.

Let’s say, for instance, that you will earn $50 per sale on a product that has a conversion rate of 4%. Given the keywords available, you can bid $1 per click and get 700 visitors per day or pay 30 cents per click and get 300 visitors per day. Which should you choose?

In the first instance, you would sell a total of 28 units and make $700 ((28*50)-(700*$1)). In the second instance, you would sell a total of 12 units and make $510 ((12*50)-(300*$1)). Even though you are spending more per click on advertising in the first instance, you will still profit more, which means you should select this option.

At first, using this entire math may seem unnecessary, but it isn’t. Without tracking these variables and making decisions based on them, you will have no idea how to set bids; and will suffer as a consequence.