I get this question often: How much should I pay per click for Google Adwords?

Here are a few simple ideas to include to determine how much you should pay per click or how much you should bid.

1. Identify the type of clients you would like to get first – be sure to target those that are most profitable to you.

If you are a dentist, and dental implants is more profitable service than standard cleaning, then you may want to focus on dental implant keywords first. You expand and optimize keywords related to dental implants until you reach a point where you are getting the desired return on investment before moving on to a different type of client.

If you are an insurance agent, maybe auto insurance is the most profitable to you, then you focus on auto insurance first after you reach a point where you have a profitable campaign, you can then branch out perhaps to life insurance then to home insurance whatever is your priority.

2. How to determine bids.

I typically suggest to my clients that you should start by looking into how much you are willing to pay per lead or per sale and determine how much ROI you’d like to get, you might not achieve this in the first few months but eventually with the right optimization strategy you eventually will.

Say for example, each sale you’ll get a $100 gross profit the first year, a total gross profit of $300 over 3 years and then $500 in 6 years. And since you’d like to be aggressive, you could dedicate $100 to the acquisition cost of a sale, so this will break even the first year and give you an ROI of 200% in 3 years(or 400% in 6 years.)

Using $100 as acquisition cost, depending on how well targeted your keywords are. You could get 1 conversion every 20 clicks or 1 conversion every 30 clicks, so you could theoretically pay $5 or $3.33 for each click to get one conversion respectively.

The table summaries the above assumptions.

1 year gross profit $100 breakeven the first year
3 years gross profit $300 200% roi
5 years gross profit $500 400% roi
acquisition cost $100
if 1 conversion out of 20 clicks $100 / 20 = $5  $5 per click max.
if 1 conversion out of 30 clicks $100 / 30 = $3.33  $3.33 per click max.

3. How to determine your budget?

Some clients of mine would like start with a big budget with big dreams, this is not necessarily bad. However, I do suggest that we try to get a few conversions first before we push up the budget to their desired level. This helps manage their expectations better, I always get them to bid slightly higher than what the computed max bid per click is but lower the daily budget to equivalent of about 1 or 2 conversion. Get a few successes before we ramp up the budget.