How do you really determine your cost per click target?
In this article, I’ll give you the full answer. By the end, you’ll have a masters degree in cost per click. Well, not really… But you’ll be close!
Unfortunately, that’s not necessarily an easy task. It involves crunching a lot of numbers derived from your own analytics and current business expenses.
Then, after all that, you’re still left with a forecast. So it’s a good idea to plan for a margin of error.
In this article, we’ll go over how you can identify the ideal cost per click in your online advertising campaigns.
ROI: The Starting Point (Cost Per Click)
You’re in business to make money. To that end, you need to make sure that the money you invest generates a positive cash flow.
To understand if that’s happening, you’ll have to calculate your return on investment (ROI).
In layman’s terms, the ROI figure answers the question: “Am I earning more money than I’m investing in my business?”
Beyond that, ROI will also tell you the extent of your positive (or negative) return. In other words, it tells you how much money you’re making (or losing) relative to your investment.
Let’s throw some light on the subject by looking at an example.
Suppose you buy shares of stock worth $1,000. It’s a bull market, so two months later you sell those same shares of stock for $1,300.
What was your ROI in that situation?
To answer that question, you have to look at the ROI formula. Fortunately, it’s not as complicated as some of the formulas you learned about in Algebra class.
Here’s the formula for ROI:
ROI = (Gain from investment – Cost of Investment) / Cost of Investment
Now, plug the numbers from the example above into that formula. In this case, the gain from investment is $1,300 (the sale of the stock) and the cost of the investment is $1,000 (the initial amount paid for the stock).
ROI = ($1,300 – $1,000) / $1,000 or $300 / $1,000 = 0.3 or 30%
The final number (30%) is the right answer. That’s because ROI is always measured as a percentage.
If the ROI is positive (as in this case) then the investment is worthwhile. That’s because it’s generating more cash than it cost.
If the ROI is negative, then the investment is a bust. That’s because it’s generating less cash than it cost.
Let’s look at an example of a negative ROI.
Suppose you buy shares of stock for $1,000. A bear market hits, and you’re forced to liquidate your shares for $700.
Once again, let’s plug the numbers into our formula:
ROI = ($700 – $1,000) / $1,000 or -$300 / $1,000 = -.3 or -30%.
As you can see, you took a 30% loss on that investment.
It’s important to keep the ROI formula in mind as you try to determine your cost per click target.
Understanding Cost Per Click
Many online advertising platforms follow the cost per click model. That means you only get charged when somebody clicks on your ad.
In other words, if your ad appears a million times and nobody clicks on it, then you don’t pay anything. Of course, that’s a pretty clear signal that you need to work on your ad copy.
The cost per click model, by the way, is one of the reasons that online advertising is so attractive. You only pay for your ad when potential customers click on it and take a closer look at whatever it is you’re offering.
How much does each click cost? It depends.
In fact, it depends on a number of factors.
For starters, many of the same platforms that offer pay per click (PPC) advertising operate on an auction system. That means you bid on what you’re willing to pay for a single click.
Of course, like any other auction system, you can bid too high, too low, or just right.
If you bid too high, you’ll spend more money than you should on advertising and cut into your ROI. If you bid too low, your ad won’t show at all because the advertising platform will give priority to higher bidders. If you bid just right, then you’re paying the market price for a click.
So the “right” bid is driven by demand. The more that people want to bid on a particular keyword, the higher the cost per click.
Although social media advertising doesn’t usually operate on a bid per keyword, it still operates on an auction system. You’ll be competing with other advertisers for space.
That’s why it’s impossible to offer you a “one size fits all” answer in terms of what you should bid for a particular keyword or for an ad on social media. The answer is dependent on current demand and the popularity of keywords you’re targeting.
What’s Your Conversion Rate?
Next, you need to understand your conversion rate. That’s the percentage of people who click on your ad and make a purchase.
It’s important to follow that metric because, unfortunately, not everybody who clicks on your ad is going to buy your product or service.
That means the cost per click is not the same as the cost per sale.
Read that last sentence again until it sinks in.
For example, let’s say you’re running an ad for women’s shoes that costs you $1.25 per click. At first blush, you might think that’s an affordable price to pay for a click because you’ve already got a profit margin of $17 for each pair of shoes you sell.
With the cost of the ad, you profit margin drops to $15.75 ($17 – $1.25). You can afford that!
You need to take a look at your conversion rate. If only one out of every ten people who click on your ad buy a pair of shoes then you’re really paying $12.50 ($1.25 x 10) per sale.
Now, calculate your margins again. It’s $17 – $12.50. That leaves you with a much slimmer $4.50 profit margin.
Can you afford that?
That’s a question you’ll have to discuss with your accountant.
For now, though, it’s important to understand that your conversion rate and your cost per click directly tie into calculating your overall ROI.
Google AdWords Average Cost Per Click by Industry
Even though you might not know exactly what you’ll pay per click when you advertise, there are some industry benchmarks that you can use a starting point in your analysis.
If you’re unfamiliar with Google AdWords, it’s an advertising system offered by the #1 search engine in the world. It uses a pay-per-click auction model.
It’s also important to understand that AdWords offers both a search and display advertising platform. Search advertising allows marketers to bid on keywords so their ads display in the results list when people search for those keywords. Display advertising shows banner ads on websites.
The average cost per click across all industries is $2.32 for search advertising and $.58 for display advertising.
Here’s a breakdown by industry:
- Advocacy – $1.72 (search) and $0.32 (display)
- Auto – $1.43 (search) and $0.39 (display)
- B2B – $1.64 (search) and $0.37 (display)
- Consumer Services – $3.77 (search) and $0.69 (display)
- Dating Sites – $.19 (search) and $0.18 (display)
- eCommerce – $.88 (search) and $0.29 (display)
- Education – $1.74 (search) and $0.40 (display)
- Employment Services – $.4.20 (search) and $1.66 (display)
- Finance & Insurance – $3.72 (search) and $0.72 (display)
- Health & Medical – $3.17 (search) and $0.37 (display)
- Home Goods – $3.19 (search) and $0.70 (display)
- Industrial Services – $2.00 (search) and $0.60 (display)
- Legal – $5.88 (search) and $0.60 (display)
- Real Estate – $1.81 (search) and $0.88 (display)
- Technology – $1.78 (search) and $0.20 (display)
- Travel and Hospitality – $1.55 (search) and $0.24 (display)
As you can see, the Legal industry has the most expensive cost per click average. That makes sense because legal services can easily run into the thousands of dollars. So there’s potential for a good profit margin.
You’ll also notice that display ads tend to cost much less than search ads. Why is that?
It’s because search ads can be used to target people when they’re on the verge of making a purchase. So the price is higher.
For example, if you’re selling digital cameras, you’d probably want to run an ad for the keyword “cheap digital cameras.”
Why? Because anyone who searches for “cheap digital cameras” is almost certainly interested in making a purchase.
On the other hand, display ads appear when people are browsing around from blog to blog and not necessarily interested in making a purchase right away. It’s often the case that display ads are used for retargeting (or reaching people who’ve already connected with a brand).
Facebook Advertising Average Cost Per Click by Industry
Another great option when it comes to advertising online is Facebook. That’s because it allows you to target ads to people based on demographics and interests.
But how much does a click on a Facebook ad cost? Again, that depends.
The average cost per click is $1.72. There are, however, some industry benchmarks that we can look at:
- Finance and Industry – $3.77
- Customer Services – $3.08
- Home Improvement – $2.93
- Employment and Jobs – $2.72
- B2B – $2.52
- Auto – $2.24
- Industrial Services – $2.14
- Fitness – $1.90
- Beauty – $1.81
- Real Estate – $1.81
- Healthcare – $1.32
- Legal – $1.32
- Technology – $1.27
- Education – $1.06
- Retail – $0.70
- Travel and Hospitality – $0.63
- Apparel – $0.45
As you can see, some industries pay more to advertise on Facebook (for example, Auto) while other industries pay less (Legal).
Why is it that some pay so much less? Again, it’s because there’s likely very little buyer intent on Facebook.
People aren’t generally looking to buy something when they’re going through their Facebook newsfeed. Instead, they’re looking for status updates from friends and family members.
So why do other industries tend to pay more? Probably because advertisers are targeting users who show a keen interest in that industry.
Auto is a perfect example. Car enthusiasts will share their love of automobiles in status updates.
Facebook’s algorithm will determine that those people are prime targets for auto-related ads. As a result, Facebook will charge a premium for showing targeted ads to those individuals.
Google AdWords Conversion Rate by Industry
When it comes to Google AdWords, the average conversion rate across all industries is 2.7% on the search network. The overall average is 0.89% on the display network.
Again, you should expect display network conversion rates to be lower because those ads don’t usually target people at the lower end of the sales funnel.
And keep in mind that conversion rate isn’t the same thing as click-through rate (CTR). The CTR is the percentage of people who see your ad and click on it. Those people don’t necessarily make a purchase, though.
The conversion rate measures the number of people who actually make a purchase.
Now, let’s look at conversion rates by industry:
- Advocacy – 4.61% (search) and 0.37% (display)
- Auto – 2.27% (search) and 0.79% (display)
- B2B – 2.58% (search) and 0.96% (display)
- Consumer Services – 5.0% (search) and 0.96% (display)
- Dating Sites – 2.75% (search) and 0.41% (display)
- eCommerce – 1.91% (search) and 0.96% (display)
- Education – 4.13% (search) 0.5% (display)
- Employment Services – 3.97% (search) and 1.28% (display)
- Finance and Insurance – 7.19% (search) and 1.75% (display)
- Health and Medical – 2.51% (search) and 0.77% (display)
- Home Goods – 3.68% (search) and 0.77% (display)
- Industrial Services – 2.58% (search) and 0.88% (display)
- Legal – 4.35% (search) and 0.98% (display)
- Real Estate – 4.4% (search) and 1.49% (display)
- Technology – 2.55% (search) and 1.04% (display)
- Travel and Hospitality – 2.57% (search) and 0.53% (display)
As you can see, the Finance and Insurance industry does amazingly well on both the search and display networks. Real Estate does pretty well also.
That’s because those industries do some great mid-funnel marketing with display ads.
Count your blessings if you’re in one of those industries.
Facebook Advertising Conversion Rate by Industry
The average conversion rate for Facebook ads across all industries is a healthy 9.21%!
That’s great, especially considering that Facebook ads don’t typically target people who are at the bottom of the sales funnel.
Of course, Facebook ads can be used for retargeting. That strategy enables marketers to target “warm” prospects.
Here are the average Facebook ad conversion rates by industry:
- Apparel – 4.11%
- Auto – 5.11%
- B2B – 10.63%
- Beauty – 7.1%
- Consumer Services – 9.96%
- Education – 13.58%
- Employment and Job Training – 11.73%
- Finance and Insurance – 9.09%
- Fitness – 14.29%
- Home Improvement – 6.56%
- Healthcare – 11.00%
- Industrial Services – 0.71%
- Legal – 5.6%
- Real Estate – 10.68%
- Retail – 3.26%
- Technology – 2.31%
- Travel and Hospitality – 2.82%
As you can see, Industrial Services is hurting the overall average with its measly conversion rate of 0.71%. If you’re in that industry, it might be best to consider another marketing channel (probably LinkedIn).
On the other hand, Fitness does extremely well with a 14.29% conversion rate. If you think about it, Facebook seems like a great place to advertise fitness-related products and services. That’s because you can target people who are into a healthy lifestyle.
Putting It All Together
Now that you know about ROI, the conversion rate, and some online advertising industry benchmarks, you’re in a much better position to run the numbers. Let’s walk through an example.
Suppose you run a hotel and you want to do some online advertising. Obviously, that puts you in the Travel and Hospitality industry.
One of the ways that you’d like to reach people is with Google AdWords. You want to target a few keywords related to your location.
You notice that the average cost per click for your industry is $0.63 in AdWords. You also know that the average conversion rate is 2.57% for the search network.
Of course, the cost per click and conversion rate might be higher or lower depending on where your hotel is located. That’s okay, though, because you’re just playing “what if” for now.
Based on the numbers, you’re only going to make a sale from 1 out of every 39 people who click on your ad (that’s the 2.57% conversion rate).
Since you’re paying $0.63 per click, that means you’ll pay $24.57 for every conversion (39 x $0.63).
So let’s stop right there. What are your fixed costs for running the hotel?
Of course, you don’t have any inventory that you’re selling, so you have no cost of goods sold. Instead, you’re renting real estate.
That means you don’t have to worry about wholesale costs.
You do, however, have to concern yourself with operating expenses. Can you afford to spend an additional $24.57 per room that you rent out?
And even if you can afford it, is it worth the risk? After all, your conversion rate might be lower than the industry average.
If your accountant informs you that your net profit is currently about $33 per room, then you can afford the additional expense in advertising.
But it’s close. You’re left with only $8.43 ($33 – $24.57) in profit for that room. That might not be worth the risk.
On the other hand, if you’re running a luxury hotel and currently enjoying an overall profit of $67 per room, then you’ve much better margin. It might be a great idea to pull the trigger on Google AdWords advertising in that case.
Thus far, we’ve tap-danced with the numbers a little bit but we haven’t plugged them into our ROI formula. Let’s do that.
The great thing about Google AdWords is that it allows you to set a budget. That budget prevents your advertising costs from spinning out of control.
So let’s say you decide to limit your advertising budget to $100 per day. Let’s also assume that the hotel rooms you’re advertising go for $150 per night.
Let’s keep things simple by assuming that you max out your budget every day because you’re in a popular area.
In that case, you’re getting about 159 clicks every day ($100 / $0.63). You’ve got a 2.57% conversion rate, so that means you get about 4 bookings per day.
That means your earned revenue every day is $150 x 4 or $600 per day.
Now, let’s look at your total investment and return for the whole month
Assuming it’s a 30-day month, you spend $3,000 in advertising ($100/day x 30 days). You generate $18,000 in revenue ($600/day x 30 days).
If we plug those numbers in the ROI formula, this is what we get:
ROI = ($18,000 – $3,000) / $3,000 or $15,000 / $3,000 or 500%
As you can see, even though you spend $3,000 per month on advertising costs, the ROI is more than worth it. You earn a 500% return!
Of course, online advertising rarely gives you that kind of a generous reward unless you’re marketing a new-to-market cash cow.
The point, though, is that you can use the numbers to find your ideal cost per click. Let’s finish this article up by doing that.
Calculating Your Cost Per Click Target
First, establish your ROI goal. That’s the minimum amount of positive return you need for your business model when you advertise online.
Let’s say that you sat down with your accountant, went over the numbers, and determined that you need a minimum ROI of 50%.
But let’s also assume that your hotel is in an area where numerous other hotels are located. That means the bids for your keywords are considerably higher than the industry average.
In other words, you won’t be getting a 500% ROI even under the best of circumstances.
In this case, bids are around $3 per click right now. That means you’ll need to bid about that much to stay competitive.
Now, let’s run all those numbers again.
At that price, you’re getting about 33 clicks/day ($100 daily budget / $3 per click). Your conversion rate of 2.57% stays the same, so that means you’re only looking at about 1 booking per day (33 x 2.57%).
Your total revenue earned every day is right at $150 (a single room goes for $150).
That means in 30 days, you’ll generate $4,500 ($150 x 30) in revenue. Keep in mind, we’re rounding the decimal points here.
Let’s plug in the numbers:
ROI = ($4,500 – $3,000) / $3,000 or $1,500 / $3,000 or 50%
Bingo! You’re right at 50% with that a $3 cost per click.
That means your ideal cost per click is right at $3 and no higher. Otherwise, your accountant will get mad.
So here’s your assignment: set up a spreadsheet with all the relevant stats (cost per click, conversion rate, and daily budget). Then, use that spreadsheet to calculate your monthly ROI based on the numbers.
That spreadsheet should look something like this:
Once you’ve got your spreadsheet set up, just play “what if.” Adjust the CPC number until the ROI exceeds your limit. Once it does that, then you know your max cost per click.
Wrapping Up How To Determine Your Cost Per Click Target
If you want to calculate your cost per click target, you’re going to have to run some numbers. Start by using your industry average and then adjust the numbers after you check the analytics from your own campaigns.
Also, keep in mind that even if you spend a lot of money on advertising in a single month, that’s perfectly okay if you generate a healthy return.