# 3 Simple PPC Formulas Proven to Lower Your Costs

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You're better than this Wordstream
Oct 17, 2016

Please don't make light of PTSD triggers.

Mark Irvine
Oct 17, 2016

My sincere apologies, I was genuinely ignorant of the context of that phrase.
I have edited the post appropriately.

Ahmed
Oct 18, 2016

These are the best post and well define post. Thanks, Mark Irvine for sharing the idea with us.

Harrison Phillips
Oct 18, 2016

Hey Mark, love the post. When thinking about implementing it across my campaigns, I have seen that lowering/raising your CPC bid can affect your conversion rate due to changes in average position. I really like it as a benchmark rule, however.

Mark Irvine
Oct 21, 2016

Hi Harrison,

That's interesting. We've heard people with similar theories in the past, which lead us to look into the myth of average position affecting conversion rate and we don't see that happening all that frequently:

We absolutely see average position being a major factor in CTR and other SERP factors, but where the ad was on the SERP doesn't seem to affect the rate at which people convert once they arrive on your site.

hemaweb
Oct 19, 2016

Great post thank you.....

Ellie
Oct 19, 2016

Very informative post....
Thanks for sharing.

Oliver
Oct 20, 2016

I had to sit and think about the last calculation and whether or not I believed it! I think this assumes a linear corrrelation between CPC and the amount of traffic you receive. It is quite possible to spend 50% more per click and receive 20% more traffic which would mean that it doesn't work.

I am no mathematician though so I might be wrong..

Mark Irvine
Oct 21, 2016

Hey Oliver,

In the 3rd equation, we are relying on an assumption that there is a relationship between CPC and Clicks, which I'll assert is a fair assumption. If we accept that assumption, then we proceed to use clicks as a dependent, indicator variable for CPC.

Because we take the partial derivative of dProfit/dClicks, the relationship between clicks and CPC does not necessarily need to be linear, it just needs to exist.

I agree with you that the relationship between CPC and clicks often looks more cubic than it does linear, particular in top positions!

JeffB
Oct 20, 2016

Thank you for this post. Bid is part of the ad rank equation. But, how does quality score come into play with your formulas?

Mark Irvine
Oct 21, 2016

Hey Jeff,

Good question! As it turns out, quality score won't change these final CPC estimates. At the end of the day, the traffic you're getting has a set value based off your CVR and your AOV.

What quality score will change though, is your ad rank and your ad position, meaning a high quality score will get you more traffic at the same price. That means that increasing your quality score would get you more leads at the same CPC and CPA.

Jamie
Oct 20, 2016

No one told me there was going to be math. At least it was simplified, nice post!

Mark Irvine
Oct 21, 2016

Haha, I'm sorry Jamie. I should have included a warning at the top.

Erin published a post with similar purpose but avoids math as much as possible:

Ruth
Oct 20, 2016

Great post, thanks! Though I did try this out once for a few weeks, reducing my maximum bid per click to something that should maximise ROAS, but I soon found out that there is such a thing as good quality and bad quality clicks. If someone clicks your ad from position 4 or lower, in our experience, they are much less likely to convert...Pah! But it's still great to know the maths!

Mark Irvine
Oct 21, 2016

Hi Ruth,

That's a good point! Not all keywords or traffic types will have the same conversion rate, so it's best to consider this for your most clicked keywords or for setting bid adjustments.

Ty Whalin
Oct 20, 2016

Since you have been provided a nice ranking by PPC Hero I guess I will take your word for it. HA, HA. just joking. Nice set of formulas. I have seen plenty of formulas through the years and this is one of the best break downs of calculating CPC for PPC etc... Really simple to understand and yes your mother is right knowing math whether you like it or not is always necessary. I always tell my daughter to keep up with her math grades even though she does not always do so great with math. I tell her some of the same thing's as I bet your mother told you as well. Great article, a must read for anyone doing PPC and Ad Campaigns.

Mark Irvine
Oct 21, 2016

Thanks Ty,

My mom knows what's up! I'm sure this comment will make her day.

Steven
Oct 20, 2016

Good cal on CPC forumula
i'm assuming you're not concerned about ranking/position when you want to achieve your desired CPA right?

Mark Irvine
Oct 21, 2016

Hi Steven,

You're correct. These will only help you hit your CPA and ROAS goals. Higher positions will help you get more traffic and leads, but not necessarily at your target CPA.

Curt
Oct 21, 2016

How does that last one make sense? Using that formula wouldn't maximize profits; it would only allow you to break even, making no profits at all. At \$3 CPC and 2% conversion, you'd spend \$300 for 100 clicks and then make \$300 back in revenue, which is exactly even.

Mark Irvine
Oct 21, 2016

Hi Curt,

That's correct. If all clicks were the same price, that wouldn't make sense. The third equation solves for marginal CPC, the highest you'd be willing to pay for that last sale.

Albert
Oct 25, 2016

Hi there Mark,

Great post, love it. I've got 1 question though. It's about the third equation.

You say you can calculate the optimal CPC to maximize profits, but how can you be so sure that you're using the optimal CPC?

What I mean is, let's say you bid \$4 instead of \$3. Sure, you're profit per conversion will go down, but maybe the higher position of your ad will bring you much more visitors, thus leading to more conversions, and more profit overall.

Mark Irvine
Oct 26, 2016

Hi Albert,

It's true that increasing your bids would earn a higher position and that would mean more traffic, more sales, and higher revenue!

However, that marginal increase in CPC would imply that your marginal costs would exceed your marginal revenue on those last inframarginal sales. You may still be profitable at the higher bids, but you could be paying too much per click.

Bob
Oct 25, 2016

If you're going to claim this is mathematics then it's best you state your assumptions. In particular, with your calculus step you assume that all the terms are independent of 'clicks' which I think is a poor assumption.

One of the things that makes cpc difficult is that the quality of traffic, and thus conversion rate, can change drastically when you alter your bids/clicks/rank. High clicks can indicate poor quality and a lower conversion rate whereas low traffic could indicate targeted ads with a high conversion rate.

Simplification is good but there should be (LOTS of) caveats!

Mark Irvine
Oct 26, 2016

Hi Bob!

That's a keen eye! The interesting thing here is that I've actually baked in the assumption that CPC and Clicks share a direct relationship, which I'd argue is a safe one. From there, I don't solve for dProfit/dCPC but for dProfit/dClicks. Effectively, I'm exploiting their shared relationship to solve for CPC using Clicks as an indicator variable.

I also agree that CVR can depend on tons of factors (device, audience, demo, time of day), so these formulas should be used to create bid adjustments based on those segment trends too! One thing we haven't seen though, is a relationship between CVR and Ad Rank or Position, which we looked into in this post: