JON PARKER

Use the Google AdWords Bid Simulator to Maximize Total Profit

Update: You can download the Microsoft Excel template I reference below to plug in your own data!

Out of all the new features Google AdWords has released this year, I’ve found the Bid Simulator to be the most useful when optimizing campaigns.

I’m going to show you how to take advantage of the limited data Google gives us. By the end you’ll know how to use the Bid Simulator to pick bids that will produce the maximum total profit for your campaigns. Let’s dive right in.

For keywords with sufficient history and click volume, the Bid Simulator shows you how many clicks you would receive at various bid levels, and how much those clicks would cost. All data is based on the last seven days average, and is specific to your account.

Step One - Calculating Value Per Click

The first step to maximizing your total profit is to calculate your Value Per Click - or how much each click is worth to you.

You’ll need two metrics to calculate your Value Per Click - This first is Max CPA. Start by assigning a value to each of your conversions. This value is the maximum amount you can spend to aquire a conversion and still be profitable and is generally called your Max CPA.

For example, if the price of item A is $125 and it costs you $25 to make it, the value of each conversion is $100. You can spend up to $100 to obtain the conversion and still be profitable. $100 is your Max CPA.

The second metric you’ll need is your average conversion rate. To get this number, simply divide the number of conversions by the number of clicks.

Conversion Rate  =  Number of Conversions  /  Number of Clicks

You now have all the data you need to calculate your Value Per Click. The formula for Value Per Click is as follows:

Value Per Click  =  Max CPA  x  Conversion Rate

This means that, on average, each click to your website has an expected value of $5.00. So if you pay $5.00 per click you would break even.

In Google, you never pay more than your Max CPC, usually less. So by bidding at your value per click you know that on average you will break even.

Step Two - Using Value Per Click to Get Total Profit

While bidding at your Value Per Click (VPC) may be profitable, how do you find your MOST profitable bid? This is where the Bid Simulator comes into play.

The Bid Simulator lets you see the number of clicks and the total cost of those clicks at various bid (max cpc) levels, as well as the Cost Per Click (CPC) with a little bit of math (Cost / Clicks). Let’s look at an example.

You have your Max CPC set at $5.00 and Google gives you the following results as one of the rows in the Bid Simulator: The number of clicks (208) and the cost of those clicks at our $5.00 bid (697.42) for the previous seven days.

The next step is to calculate your revenue. Since you’ve already calculated your value per click ($5), simply multiply the value per click by the total number of clicks to get an expected revenue - $1,040 in this example. 

From here, we subtract the cost of those clicks from total revenue to get $342.58 of expected total profit at a bid of $5.00. Brilliant!

$1,040.00  -  $697.42  =  $342.58

Here’s the best part - we know that our $5.00 bid (max cpc) was profitable, but was it the MOST profitable bid? To find out, simply repeat this process at each bid level provided by the Bid Simulator using Excel & pick the most profitable bid! Its really that easy.

Using data from the Bid Simulator we can see

1. How many clicks we could potentially receive at different bids
2. How much those clicks would cost
3. Revenue & profit for each bid.

Looking at the data above, we can see that a bid of $11.35 will be the most profitable choice.

Feel free to leave a comment with your email address and I will send you this spreadsheet template. You can fill in your AdWords data to find out which bid maximizes your total profit.

And for the more advanced marketers, ask your Google team to include your accounts in the Bid Simulator API beta – where you can then integrate the data into your bid management software toolset. We’ve done this and have seen incredible results.

One last thing – go out and try this right now. You’ll be another step ahead of the competition.

Update: You can download the Microsoft Excel template I reference below to plug in your own data!