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Solving a Linear Equation to Advertise With Pay-Per-Click Internet Advertising

One of the primary ways of selling goods on the Internet is through buying pay per click advertisements. For example, if you do a Google search, you will get a page of results.  On the far right and possibly at the top of these results, you will see more results, but they will more resemble advertisements than results because they are in fact paid advertisements.  For more information on how this works, read at Wikipedia - Pay Per Click.  So if you are bidding $0.35 per click on a Google ad, then every time someone clicks on your ad, you are billed $0.35 .  The hope is that when all is said and done, you will, on average, make more than $0.35 per click in sales.  According to Searchengineguide.com, you might expect a conversion rate of about 6% (I averaged the low of 2% with the high of 10%).  So if you get 100 clicks, you spend $35 and make 6 sales.  Now, the math comes in: How much must you make on each sale just to break even?

Here's The Math
(6 Sales)*(X dollars/sale) = $35  or  6X = 35 which results in X = 35/6 = $5.83 per sale.  So, if you make over $5.83, your pay per click venture is successful.  If you make less than $5.83, you lose money on each sale obtained through your pay per click efforts.

But Wait, That's Not All!
In the previous paragraph, we assume that the $0.35 per click bid will get you 100 clicks.  If the market is very competitive, the $0.35/click bid may not even get your ad listed on page 5 or page 6 of the search results and you may only get 20 clicks per day.  Let's assume that you make $10/sale and you can get 40 clicks per day by bidding $0.45 per click and you can only get 20 clicks per day with the $0.35/click option.  Which option is better?.

At $0.35/click * 20 clicks, your cost is $7 and your profit is 20 * 6% * $10/sale = $12.00 so your net profit is $5.00 .

At $0.45/click * 40 clicks, your cost is $18 and your profit is 40 * 6% * $10/sale = $24.00 so your net profit is $6.00 .

Will $0.55/click be better yet?  Maybe or maybe not.  This depends on how many clicks you can get.  If you only get 10 more clicks (50 clicks) than at $0.45, then your cost is 50 * $0.55 = $27.50 and your profit is 50*6%*$10/sale = $30 so your net profit is only $2.50. So if this were the case, it would make sense to stay at about the $0.45/click rate.

There's Even More - Name Recognition and Repeat Visitors
A company might want as many visitors as possible, even if it means the pay-per-click runs at a loss in order to establish the brand and get visitors to bookmark the site and make repeat visits. The repeat visits, after all, carry no pay-per-click costs.  This is why the large brand name items sold on extensive ecommerce sites offering lots of customer services (like Amazon.com)  are usually at the top of the pay per click results. See this search on "books".

 

 

 

 

 

 

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