Use simple math to figure out how many clicks you can get with your target AdWords budget by reviewing average CPCs for your industry. You can take this information a step further by taking into consideration your current conversion rates to figure out what types of returns you can expect from AdWords.
First, understand average CPCs for your target keywords by following the steps outlined in the Analyzing budgets and bids to determine market saturation recipe.
Once you know the average CPCs for your keywords, pick a budget that you're considering testing AdWords with. Next, you can calculate potential returns using some assumptions about conversion rates across different industries, or even better, using conversion rates from other online marketing efforts you may have tried.
If you've done some advertising online and have an idea of how your website converts, you can use that number to make some initial assumptions about potential AdWords returns. However, keep in mind that different sources of traffic do tend to convert differently as well. For example, you'll likely see higher conversion rates from repeat visitors who are returning to your website after bookmarking it than you would from first-time visitors who are researching a product.
If you are not sure how many of your visitors tend to convert, you can use more general and conservative assumptions. Start with 2 percent until you gather some data specific to your industry or specific to your website.
Let's now try to calculate potential return from AdWords. Let's say our average CPC is $1 and we have a budget of $100 with which we'll get 100 clicks. With an assumed conversion rate of 2 percent, we'll get 2 conversions for each $100 spent on AdWords with each conversion costing us $50.
Even if we are not sure what your conversion rates will be like, you can use average CPCs to figure out if AdWords is a viable way to advertise online. If average CPCs for your industry are high, say $10, and you are only willing to pay $20 for each conversion, then AdWords is most likely not going to bring the returns you expect, since you would need a 50 percent conversion rate for the math to work in your favor, and such conversion rates are very unlikely.
The next important question is how much each conversion is worth to you. If you are paying $50 for each conversion, but make $1,000 from each conversion, then AdWords is obviously profitable. However, if it costs you $50 to convert a visitor but that visitors buys a $10 product and tends to never to come back to your site again, you are likely losing money with a 2 percent conversion rate on AdWords.
One of the most important metrics you'll want to set for yourself is how much you are willing to pay for each conversion and then optimize AdWords campaigns with that goal in mind.
The cost-per-conversion is often referred to in the PPC world as your CPA.
Cost-per-action (CPA) = Total Cost / Conversions
Note
CPA as cost-per-action usually corresponds to pay-per-lead, while CPA as cost-per-acquisition usually corresponds to pay-per-sale.
There is no such thing as high or low CPA that we can generalize across all advertisers. CPA is relative and different business models will have different CPA thresholds. For example, a lawyer could pay $400 for an AdWords lead but that lead could result in a case that brings the firm millions of dollars, in which scenario a CPA of $400 would be a bargain.
Your returns will vary based on a variety of factors, including your website, how compelling your products and services are, pricing, and special offers to name just a few. Your conversion rates will also vary based on how you stack up in all of these considerations against similar businesses online.
I've had clients who said that one of their conversions could pay for a month of their advertising costs due to the nature of their business, and I've had clients who were only willing to pay a few dollars for each conversion, as the average value of each converted user was much lower. How much you should pay for each conversion will be unique to your business model, goals, and objectives.