How to Calculate Allowable Cost Per Conversion

One of the key components to PPC (pay-per-click) success is bid management and an essential part of bid management is knowing your Allowable Cost Per Conversion (ACPCon) or how much you can afford to spend to get a customer.

Cost per conversion (CPCon) is not the amount bid on an ad. CPCon is the number used to calculate how much to bid for a specific ad. In order to calculate the maximum allowable bid, the CPCon needs to be divided by the number of clicks it takes to achieve a conversion.

Allowable Cost Per Conversion for Tangible Products

If your site is an ecommerce site, calculating an allowable cost per conversion can be very easy:

Average order value – cost of product – overhead costs = Profit Margin

From this number you need to consider how much of your profit margin you wish to spend on acquiring an order.

This is the most basic way of factoring an ACPCon, which can then be used to calculate an appropriate bid for pay per click campaigns. But there are other things that you can consider to adjust that amount. These are:

• Lifetime value of a customer – Most likely, a certain amount of new customers that you gain through pay-per-click will become repeat customers. Take a look at your order history to see what percentage of new customers become repeat customers. Come up with an average lifetime value for a customer by averaging the amount of money each customer spends over the course of a year or two, rather than just each order. Consider calculating your ACPCon using lifetime value rather than per order value. Replace Average Order Value with Average Lifetime Order Value.
• Return visitors – Although a customer may come through your PPC ad, they may not purchase on that initial visit — or even for months afterward. Look at your analytics to determine the return rate of visitors to your site and how long the average visitor takes to return. Apply that information to your ACPCon.
• Offline sales – Many online retailers also have offline sales. A certain percentage of people who visit your site will complete their purchase offline, either on the phone or in a brick and mortar location. If you feel this kind of behavior is happening with your customers, adjust your Average order value to accommodate that.

Example: Based on Average Sales Value

Average Sales Value = $100

Cost of Product = $50

Overhead = $10

Profit = $30

Allowable Advertising Spend = 25% of Profit, or ACPCon = $7.50

Order Conversion % = 5% of all clicks

Allowable Bid =