Learn how to calculate how much you should be spending on your advertising objectives. Learn the math involved to figure out your LTV (loan to value), CPA (cost per acquisition), and ROI (return on investment).
- Hey! And welcome to another episode of marketing tips. I'm Brad Batesole and today we're talking about how to set your bid when buying paid ads. Now I get asked this question almost everyday. What should I set as my max cost per click when I'm running ads? Honestly, it's a tough one to answer. There are a series of calculations that you need to make in order to arrive at a rough number, or at least a healthy starting place. Now, I talk about all of these calculations if you'd like to go even more in depth in my Online Marketing Foundations Course.
But, if you're looking for a quick way to do the math, I've built a simple calculator in Excel. You can grab this out of the exercise files, or follow along and I will share with you the calculations that I am using at each step. So, the first thing we need to do is understand the lifetime value of our customer. This is essentially how much a customer is going to be worth for the duration of their relationship. So, let's assume that we are a hotel, and the average night will profit us $100.
And a customer will on average buy three nights, whether it's three nights in a row, or three nights over a few years, this is the average number of repeat purchases from this customer. Now, the net sale is the profit, so, not the amount we are collecting but how much is left over after all the costs are removed. So, I'll take the net sale and multiply it by the number of repeat purchases and I'll arrive at our lifetime value. Now this is an incredibly simplistic way to calculate LTV.
I highly recommend that you dig deeper into how to really arrive at this number. But, if you're trying to just get some basic math going to understand where you're going to be at, this should be sufficient. From here, we need to figure out our cost per acquisition that we are willing to pay. For starters, the average CPA target is about 1/3 of LTV. In this case, I set it to 33%, which arrives at a max of cost acquisition of $100.
You will see that this is simply our LTV multiplied by our 1/3 metric. Now, you can adjust this target if you're willing to spend more for a customer. This may be true, if you have a very high Life Time Value. From here, we need to identify our Break Even Cost per Click, or our Maximum Average Cost per Click. I say average, because within the Google Ads platform they have a variation where they can spend more than your maximum cost per click.
So, we set it as the average. You'll need to identify your conversion rate for this. You can either enter in the conversion rate as it pertains to your current sales, or you can use the calculator to solve it for you by entering in your total visitors for a period of time and the total sales for that same period of time that were attributed for those visitors. In this case, let's assume that our conversion rate is 8%. What this does is it identifies our break even cost per click value, or our maximum cost per click as $8.
This is essentially our conversion rate times the cost acquisition rate. Now, $8 amount is our break even, meaning we should arrive at exactly the $100 target if everything goes well. But, with all advertising there are some variances. So, I like to have a Peak Adjustment. In this case, I discount the average CPC to arrive at our ideal Maximum CPC. This is a place to start. For me, this is the maximum average cost per click times our peak adjustment value, which I set to 70%, you can play with this metric, and this gives us a starting maximum CPC.
This is just some math to get you started. Start running ads on this, and then you can adopt this as you see what works in the real world. So, don't be afraid to bump up your CPC as you test your campaign, but this math and methodology is a great place to start. Thanks for checking in this week! As always, I'd love to hear from you. Connect with me on LinkedIn, or reach out to me on Twitter via @bradbatesole. Let me know what you think about this week's episode. I'll see you next week.
Note: Because this is an ongoing series, viewers will not receive a certificate of completion.