While sorting through entries for the Pimp My Site contest this past week, I've noticed a recurring theme. Site owners looking to go the do-it-yourself route are ignoring organic search optimization and moving forward with pay-per-click campaigns. This wouldn't be such a bad thing, except for another recurring theme: they are losing money.

While organic search can be an intimidating prospect for a small business owner to tackle on their own, the seemingly simple concept of pay-per-click entices many business owners into the sometimes choppy waters of paid advertising. The problem is that a mismanaged pay-per-click campaign can quickly leave a business owner with no more sales than they had before and an empty bank account.

How can a small business owner avoid this? By learning that above everything else in a paid search campaign, you simply cannot afford to spend more than you earn. Yes, it's important to understand and use landing pages, to monitor for click fraud and to test different ad text, but above all else, you've got to know what you can afford to spend. Otherwise, the temptation to outbid your competitors, no matter what the cost, can shut you down almost before you even get started.

The question now becomes how do you even know how much you can spend? The folks at WebPositionAdvisor.com have come to the rescue and provided an easy to use calculator designed to help you set your bid price. The Pay Per Click Calculator simply asks you to provide your conversion rate, the amount of profit you make with each sale and how much of that profit you are willing to spend on advertising.

Here's a few examples of how to use it.

Cost of Generating Business Leads

Let's say that you run a home improvement business in Dallas, Texas. You are currently using Yellow Page advertising, TV commercials and newspaper ads. You'd like to add a pay-per-click campaign to the mix to drive traffic to your web site. By looking at your current advertising campaigns, you can figure that a lead from the Yellow Pages costs you $75. A lead from a TV commercial costs you $120 and a lead from a newspaper ad costs you $90. You have had your web site online for awhile and you know that 4% of the visitors that find your site via search engines fill out your online lead form.

You decide that you would like have a lead cost of $40 from PPC, but you're willing to go as high as $75.

Using the Pay Per Click Calculator you enter 4% as your conversion rate. You then enter $40 as your profit per sale, and 100% as your percentage of profit to spend. (Since we are figuring lead costs instead of actual product costs.) The calculator lets you know that you can spend up to $1.60 on a click to maintain your $40 cost per lead. Or, you can bid as high as $3 per click and still maintain a cost per lead of $75.

You can use this information as a starting point for setting up your campaign. Over time, as you start to track the actual conversion rates of each group of keywords, you can go back and rerun the numbers so that you can make adjustments to your bid. (For instance, a keyword that converts at 15% would allow you to spend $6 a click while still maintaining a cost of $40 per lead.)

Cost of Generating Product Sales

Let's say that you run an e-commerce site that sells jewelry. Your site has been online for a few years and you do fairly good business, but you'd like to expand your reach because you've introduced some new product lines. Most of your traffic currently comes from organic search listings and links from other web sites. Until you can gain organic listings for your new product line (let's say it's silver bracelets), you'll need to rely on pay-per-click ads for traffic.

You know from your current web stats that you have a 5% conversion rate for traffic that finds you via links and a 2% conversion rate for search engine traffic. Overall, your site averages a 3% conversion rate. The average sale for a first time buyer is $120. Your profit margin is 40% and you are willing to put half of your profit back into advertising.

Using the Pay Per Click Calculator, you enter 3% as the conversion rate. You then enter $48 as your profit per sale and 50% as your percentage of profit to spend. The calculator lets you know that you can spend 72 cents per click. As in the example above, you can make adjustments to your individual keyword phrase bids after you start to see how each of them convert.

Discuss this article in the Small Business Ideas forum.
July 11, 2005

Jennifer Laycock is the Editor of Search Engine Guide, the Social Media Faculty Chair for MarketMotive and offers small business social media strategy & consulting. Jennifer enjoys the challenge of finding unique and creative ways to connect with consumers without spending a fortune in marketing dollars. Though she now prefers to work with small businesses, Jennifer’s clients have included companies like Verizon, American Greetings and Highlights for Children.

Search Engine Guide > Jennifer Laycock > Help Set Your Budget with Pay-Per-Click Calculator