The purpose behind this article is to help online advertisers determine the maximum cost per click or bid they are willing to spend in order to maximize profit for their product or service.

The PPC cost associated with a search term can vary quite dramatically from a few pennies to several dollars per click depending upon the amount of competition for that search term.

Should you spend $0.50 or $5.00 on each click to your website? How does one determine if $0.50 cents or even $5.00 is the right amount to spend for a single click?

To provide a more definitive answer for determining our maximum bid strategy, you will need a further understanding of conversion rate in order to avoid spending more on advertising than profits generated.

Conversion rate is simply defined as the number of buyers divided by the number of visitors. 1/100 =..01

So if you receive 100 visitors to your website and one of those visitors buys something then your conversion rate is 1% (1-buyer of 100-visitors).

While it is desirable to have a high conversion rate, your conversion rate may be higher or lower than 1%. The number one rule for a favorable conversion rate is to ensure your ad-copy is in line with or compliments your landing page. You want to best compliment the searchers intent and make it easy for visitors to buy what you are offering. If you are advertising to North America, you don’t want to advertise for new heating units in the middle of December and have your ad-copy take your visitors to a landing page listing a full catalog of air conditioning units. Conversely, do not target search terms unrelated to your ad-copy. Do not target the search term, “used air conditioning unit” and use ad-copy that only states, “new air conditioning units.”

You may be asking, “How do I track conversions?” The major PPC players: Google Adwords, MSN Adcenter and Overture/ Yahoo Search Marketing have built in conversion counters that track conversions from java script codes that you must place on your landing pages and finish pages. For more details about conversion tracking codes, please visit each respective PPC search engine.

Remember, we need to still figure out if our maximum bid should be $0.50 or $5.00. For the purpose of this example, we will assume your conversion rate is 1% and that the profit you earn after said product is sold is $50.00.

The truth is in the numbers:

(conversion rate) x (profit from product or service sold) = (maximum bid price) 1% or..01 x $50.00 = $0.50

Check your math: $0.50 x 100 visitors = $50.00

So if you bid $0.50 per click and your profit from each product sold is $50.00 and your conversion rate is 1%, you would break even at 100 clicks. If your conversion rate was 1% and your cost per click was $5.00, you would lose money.

You may be starting out and not have any conversion data to base a decision on. Here, you will want to set a bid strategy based on a budget of running your campaign for two weeks in order to collect data. $1,000 - $2,000 over a two week period would produce a fair sample size. The data collected will show you click through rates and conversion rates for your product or service being offered. After the two week testing phase, you will be able to lower or raise your maximum bid for a higher or lower position for optimal Return on Investment (ROI) or Return on Ad Spend (ROAS).

This should be enough to set you in the right direction when deciding how much to bid for your PPC keywords. Remember that PPC is about increasing your sales and website revenue. It is not about finding low paying keywords and drawing visitors to your website. It’s a mathematical equation that states: if I am to spend x on promotion y it will increase profit margins by p. Remember to equally match your ad-copy with your landing pages to better compliment your searchers’ intent and to target the correct keywords.