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Here are some tips to consider when you have already started a pay per click advertising campaign or planning to start a pay per click advertising campaign. Looking at some metrics and determining the value for some metrics will help you make better decisions.

In case you don’t have data to evaluate, run a test campaign focusing on your main keywords for a limited budget to determine your pay per click advertising strategy. Don’t forget to add the conversion tracking code to your website.

Click through rate (CTR): The no. of people who clicked on your ad /Total no. times the ad was served.

Conversion rate: The no. of people who clicked on your ad and went on to purchase a product online (it could be different depending upon the what is conversion according to you).

Obtain the industry average CTR and Conversion rate from your account executives of Google/Yahoo. Use that to see how good or bad your account is in comparison and take actions accordingly. Remember the industry averages they provide can act as reference point to evaluate how well your account is performing. But that doesn’t guarantee accuracy. You can use 3rd party data from various vendors too.
Cost per conversion: The amount you spent to acquire a customer. Your cost per conversion should never more than your cost per acquisition (CPA).

Cost per Acquisition (CPA): The amount you are willing to spend to acquire a new customer. The easiest way to calculate CPA is to identify how much profit you are making per conversion and determine from that, how much you are willing to spend to get a new customer. This can get complex depending upon the advertiser as they also consider various factors such as Life time value etc. Also if you are using historical data to forecast sales for the current year, you can use it to determine the CPA.

CPA = Advertising budget/Total no. of conversions

Ex. You sell luxury chocolates online and know from historical data adjusted for variability that your sales will be 500 boxes of chocolates. Let’s say you have allocated $10000 for advertising. Then the amount you can spend to get a sale:

CPA = $10000/500 = $20 per sale

Some advertisers know the advertising budget and the dollar they are willing to spend to get a conversion, but may not know the number of sales they need to breakeven. You can determin that as follows:

Total no. of conversions to breakeven = Advertising budget/CPA

This is just to give you an understanding. The way some of these metrics are determined may vary depending upon your business.

Cost per click (CPC): The amount you are willing to spend per click to drive visitor traffic to your website.

Cost per click can be determined by knowing number of visitors(clicks) required to make a conversion.

No. of clicks req. to make a conversion = Total number of clicks /Total number of conversions

Maximum cost per click = CPA / No. of clicks req. to make a conversion

Ex:You sell luxury chocolates and ran a test advertising campaign (details below). You had 10 sales (conversions) at $15 per conversion. Let’ assume you CPA = $20.

Pay per click advertising

You Cost per conversion is less than your CPA which is good. You would like to determine how much you should be paying per click.

No. of clicks req. to make a conversion = 50 clicks / 10 conversions = 5 clicks per conversion

Maximum cost per click = $20/5 clicks per conversion =$4

Your actual CPC is less than your Maximum CPC which is good. If your Actual CPC is greater than you Maximum CPC, then you better start working. The above information should get you started and help you improve your pay per click campaigns.