The Math Behind the Perfect Bid - google-ads-adwords

Day 25 of AdWords Help: The Math Behind the Perfect Bid

Today’s Google Ads Help is an incredibly simple, yet often overlooked piece of the puzzle.

It’s very normal for people to focus on keyword research, match types, budgets, and ads. Those are all extremely important and have a big part in your success on AdWords.

However, even the best ad, the perfect keyword, and an ideal budget is wasted on a bid that is either too expensive or too low.

THE UNFORTUNATE CAMPAIGN THAT NEVER GOT A CHANCE

Bidding Is Life-Or-Death For PPC Accounts

I was talking with a potential customer the other day…Does this sound like you?

“I launched my campaign a few weeks ago. I’m getting some sales, but it’s so expensive! I’m not making any money. I’m spending 100 dollars to make 50 dollars.”

The potential client went on to turn off their ads completely.

I call situations like this: the unfortunate overpaying account.

Even with a strong conversion rate and lifetime value, the economics of paying for a click that’s too expensive never work.

Let’s assume that you’re bidding on a perfect keyword, and know you’ll make 500 dollars for every 100 clicks (5% conversion rate with a 100 dollar product).

What happens when you start overpaying?

bidding too high in adwords

It’s very possible that your account is in the “overpaying” stage. On the other hand, maybe you have a 3x or 4x ROI on your campaigns – but you need a 6x in order to be profitable (maybe you’re a drop-shipping or wholesaler with tough margins).

The good news is, you can fix:

  • Relevant, but expensive keywords and
  • Unprofitable, but well-targeted campaigns

All with some very simple math: bid management.

How Google Ads (or any PPC platform) Bid Management Works

Bid Management is actually incredibly simple.

To start, you only need to think about a few metrics:

  • Goal ROI or CPA (cost per acquisition)
  • Current ROI or CPA

That’s literally it. Let’s dig in.

Start by opening up excel and creating columns for your: Current ROI and Target ROI.

bid modifier

What we’re going to be finding is our “bid modifier”.

There are all sorts of bid modifiers in Google Ads. After this post, you’ll understand how to set bids on the hourly level, set geographic-based bid modifiers, and even device-based bid adjustments.  The good news is: they all follow a simple math formula.

ROI vs. CPA

It’s worth it to take a moment and define what we’re trying to do.

ROI (Return on Investment)

Return on Investment in your AdWords account is measured like this:  (Revenue from Ads / Cost of Ads). You end up with a whole number multiple. For example, if you make 100 dollars from 10 dollars, that’s a 10x ROI. You made ten times your money – woohoo!

You want this number as high as possible.

CPA (Cost Per Acquisition)

With CPA, you measure your cost per acquisition. This is the go-to for measuring lead-generation campaigns. It’s calculated by dividing the cost by leads. 100 spend by ten leads equals a 10 CPA. You want this number to be as low as possible.

Now that we’ve done that, let’s look into the math behind the perfect bid.

The Math Behind the Perfect Bid

In the video below, you’ll see the simple equations to calculate your new bids based off of your historic performance.

Video Notes:

  • To establish a new bid, you need a few things
    • Current bid
    • Current ROI (or current CPA)
    • Target ROI (or target ROI)
    • Use the above to get your bid modifier.
  • Let’s say you want to go from a 2 ROI to a 4 ROI. All we need to do is:
    • Put our current ROI over target ROI (Minus one) * 100 to get a percent
  • Now that you have your bid modifier, calculate your new bid.
  • You’ll now have your costs, resulting in double ROI.
  • With cost per lead, we want it to be as low as possible – compared to ROI, where we want it to be high as possible.
  • We need to change our formula a bit
    • Put our target CPA over current CPA (minus 1) * 100 to get a percent

Go Forth With Your New Bids!

You can now modify your bids based on your goals. From here, you can download all your data from AdWords Editor, open Excel, run the calculations, and upload back into Google Ads Editor. New bids can be yours in a few minutes a day.

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Michael Erickson

Michael Erickson

Emailing my clients and telling them I helped increase their return on ad spend by 300% never gets old. I love rising above the technical jargon and providing your business with online marketing momentum to reach new heights. Enthusiast for all things science, surfing, and Search Scientists.
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