The first advertising exercise finished over at The Advisory Panel, and as a result I discovered that some of the PPC basics I took for granted weren’t very clear to everyone. So I figured it was time for a post about them.

When you’re paying per click for your advertising, you have to make sure that you can show a profit after paying for the clicks. So there are some calculations you can do up front to give you a good idea how much you can pay per click. Let’s look first at a statistic that most merchants give you.

EPC is the average earnings per hundred clicks. This is the dollar amount you can expect to make when you send one hundred people to the merchant’s page. This is usually reported by the merchant as an average across all the traffic they’re sent. You may also get it reported for your specifically after you have enough traffic being sent.

Keep in mind that since the merchant’s EPC is an average over all their traffic, you might be able to do better than that if you’re sending well-targeted traffic to them. You might also do worse, if the traffic you send isn’t very targeted.

So, let’s say that we know the EPC for a particular product is $54.07 (this is the actual EPC for a particular product you can market through Commission Junction). So what do this number tell us? Well, nothing exactly, but we can use it to come to some first guesses about what we can afford to pay per click.

If we think we’ll make $54.07 per hundred visitors, that means our income per visitor is $0.54. Remember that each visitor is a click we had to pay for, so we have to pay less than $0.54 to make any profit.

Now, you cannot rely totally on merchant’s EPC figures. Those include a wide variety of traffic, and no doubt include some traffic sent by marketing superstars. But as a rough guess for planning out a PPC campaign, you can use EPC to come up with an initial keyword bid.

Given the numbers above, we could look at various targeted keywords and decide if they could be profitable, based on whether we could get our ad at position 3 or 4 for under $0.54. Ideally we’d be far enough under that we make a decent profit.

This is most definitely not the entire story! You also have to track your own results, and adjust based on what you’re actually earning once you start getting enough traffic. Traffic must be well targeted, or you’ll be wasting money.

But it gives you a rough idea of how to evaluate keywords to see if you might be able to earn from them.

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