Today’s Google Ads Help is an incredibly simple, yet often overlooked piece of the puzzle.
It’s very normal for people to focus on keyword research, match types, budgets, and ads. Those are all extremely important and have a big part in your success on AdWords.
However, even the best ad, the perfect keyword, and an ideal budget is wasted on a bid that is either too expensive or too low.
THE UNFORTUNATE CAMPAIGN THAT NEVER GOT A CHANCE
Bidding Is Life-Or-Death For PPC Accounts
I was talking with a potential customer the other day…Does this sound like you?
“I launched my campaign a few weeks ago. I’m getting some sales, but it’s so expensive! I’m not making any money. I’m spending 100 dollars to make 50 dollars.”
The potential client went on to turn off their ads completely.
I call situations like this: the unfortunate overpaying account.
Even with a strong conversion rate and lifetime value, the economics of paying for a click that’s too expensive never work.
Let’s assume that you’re bidding on a perfect keyword, and know you’ll make 500 dollars for every 100 clicks (5% conversion rate with a 100 dollar product).
What happens when you start overpaying?
It’s very possible that your account is in the “overpaying” stage. On the other hand, maybe you have a 3x or 4x ROI on your campaigns – but you need a 6x in order to be profitable (maybe you’re a drop-shipping or wholesaler with tough margins).
The good news is, you can fix:
- Relevant, but expensive keywords and
- Unprofitable, but well-targeted campaigns
All with some very simple math: bid management.
How Google Ads (or any PPC platform) Bid Management Works
Bid Management is actually incredibly simple.
To start, you only need to think about a few metrics:
- Goal ROI or CPA (cost per acquisition)
- Current ROI or CPA
That’s literally it. Let’s dig in.
Start by opening up excel and creating columns for your: Current ROI and Target ROI.
What we’re going to be finding is our “bid modifier”.
There are all sorts of bid modifiers in Google Ads. After this post, you’ll understand how to set bids on the hourly level, set geographic-based bid modifiers, and even device-based bid adjustments. The good news is: they all follow a simple math formula.
ROI vs. CPA
It’s worth it to take a moment and define what we’re trying to do.
ROI (Return on Investment)
Return on Investment in your AdWords account is measured like this: (Revenue from Ads / Cost of Ads). You end up with a whole number multiple. For example, if you make 100 dollars from 10 dollars, that’s a 10x ROI. You made ten times your money – woohoo!
You want this number as high as possible.
CPA (Cost Per Acquisition)
With CPA, you measure your cost per acquisition. This is the go-to for measuring lead-generation campaigns. It’s calculated by dividing the cost by leads. 100 spend by ten leads equals a 10 CPA. You want this number to be as low as possible.
Now that we’ve done that, let’s look into the math behind the perfect bid.
The Math Behind the Perfect Bid
In the video below, you’ll see the simple equations to calculate your new bids based off of your historic performance.
Establishing a New Bid: A Step-by-Step Guide
To set a new bid effectively, you’ll need a few key metrics:
- Current Bid
- Current ROI (Return on Investment) or Current CPA (Cost Per Acquisition)
- Target ROI or Target CPA
Step 1: Determine the Bid Modifier
Adjusting for ROI
If your goal is to improve your ROI, for example, from a 2 ROI to a 4 ROI, you’ll first calculate your bid modifier. To do this, compare your current ROI to your target ROI. The difference will give you a percentage that represents how much you should adjust your bid.
For instance, if you want to go from a 2 ROI to a 4 ROI, you would decrease your bid by 50%.
Adjusting for CPA
If you’re working to lower your CPA instead, the process is similar but focuses on your cost. You’ll compare your target CPA to your current CPA to determine the necessary bid adjustment.
For example, if your target CPA is $20 and your current CPA is $40, you would also decrease your bid by 50%.
Step 2: Calculate Your New Bid
With your bid modifier calculated, apply it to your current bid. If your current bid is $2 per click and your modifier indicates a 50% decrease, your new bid should be $1 per click.
Step 3: Implement and Monitor
After applying your new bid, keep an eye on the results. You should see a reduction in costs, leading to a better ROI or a lower CPA, depending on your goal.
Conclusion: Understanding Cost per Lead vs. ROI
Remember, while ROI aims to be as high as possible, Cost Per Lead should be as low as possible. This means your bid adjustments will vary depending on the metric you’re optimizing for, but the process remains systematic and data-driven.
We live, breathe & Dream Paid Traffic
Go Forth With Your New Bids!
You can now modify your bids based on your goals. From here, you can download all your data from AdWords Editor, open Excel, run the calculations, and upload back into Google Ads Editor. New bids can be yours in a few minutes a day.
Check out more blog posts:
11 Replies to “Day 25 of AdWords Help: The Math Behind the Perfect Bid”
I learned a lot here, Michael. Thanks for sharing this, especially the video. As someone new to AdWords, I had heard of this topic, but didn’t know the details. Breaking it down like this with the numbers makes it simple to digest.
Thanks @disqus_cYP13UD0zc:disqus
I was doing PPC for maybe a year until I really sat down and “got” the math behind bidding. I think some people in the industry never do! 😉
Hey – sorry for probably a super dumb question but why would you use minus one thing in the formula necessary to calculate the bid modifier. Thanks a lot for that.
No problem at all Katarzyna
What you’re really calculating is a percent change modifier. You’re answering the question, “by what number do I need to multiply by in order to get to my target?”
In other words: my target is what percent change away?
Check out this post:
Check out “method 2” here: https://www.mathsisfun.com/numbers/percentage-change.html which is similar
Found a typo here: “You’ll now have your costs, resulting in double ROI.”
Halve* 🙂
Great topic and a must-do for most accounts.
Q1: “Let’s say you want to go from a 2 ROI to a 4 ROI.” — Stupid questions. Does the values indicate 2x and 4x values? e.g. I want to increase my current ROI by 4 times what it currently is.
Q2: How do you guys approach a brand new client when they haven’t tracked their ROI using ValueTrack parameters and using a CRM? Do you first get that in place and let it run for a while before you apply the aforesaid tactic?
Q3: How often do you perform this tactic on an account? I’m sure weekly/monthly since you need to analyse trends and impact of each adjusted bid.
2x ROI means the revenue is 2x what the ad cost is. i.e. spend 50 make 100 is 2x ROI.
Always be tracking! Can’t optimize what you can’t track.
How often? As much as it necessitates 😀
Thanks a lot, makes clear sense.
Q: How do you approach bid adjustment on a longer sales cycle (using the aforesaid calculations)? Let’s say you only close a deal every 4 months.
Q: Also; let’s say you drive a sale during the first month and you calculate the ROI of the ad spend. Another couple of months pass and you make recurring sales from the initial lead. Do you then attribute the sale value to the initial ad/keyword that drove the lead?
Indeed there are nuances. And yes, it should be based off the LTV. The reason why is the more you can spend to acquire a customer and still make profit allows you to spend more than your competition – who may have a lower LTV.
Alternatively you can write:
new bid = old bid / (Actual CPA / Target CPA)
Thanks @disqus_HIXZl0ZAQD:disqus
You can also write: CPC = CPA * Conversion Rate
and (Conversion Rate x Profit per Conversion) / Target ROI % = Maximum Bid
and (Conversion Rate x Profit per Conversion) / (1/Target ACOS) = Maximum Bid for all those amazon sellers.
I dig it – I just added it to my bid calculator!