23 PPC formulas everyone should know

/ PPC / September 02, 2019 / Comments

One of the first things that people learn when starting out in PPC are some basic formulas like how to calculate clickthrough rates and cost per clicks.

A PPC account can’t be managed successfully without knowing a few basic formulas.

This is because to do data analysis, it is necessary to manipulate the data in ways that reveal where the opportunities and pitfalls are.

I’ve put together a list of 23 PPC formulas that I’ve found to be the most useful. We’ll start off with the most basic ones first and then move onto some more advanced formulas.

Cost per Click (CPC)

This is for when you’re getting clicks and accruing cost but you want to see an average of how much each click is costing.

Calculating metrics such as Cost per Thousand Impressions (CPM), Cost Per View (CPV) and Cost Per Engagement (CPE) would be done in the same way.

Cost / Clicks = CPC

Clickthrough Rate (CTR)

CTR shows the percentage of times that an ad was clicked compared to the number of times that it was shown. This can be used as a starting point to decide which ad copy performs the best in your account.

Calculating metrics such as Interaction Rate, View Rate, Invalid Click rate and Engagement rate would be done in the same way.

Clicks / Impressions = CTR

Conversion Rate (CVR)

CVR shows the percentage of times a conversion action occurred compared to the number of times the ad was clicked. It can be used to analyse which keywords are better at converting users than others.

Conversions / Clicks = CVR

Cost Per Conversion (CPA)

If you wanted to see the average amount of money that needs to be spent before you tend to get a conversion, you would look at your CPA.

This metric can have several different names depending on what is being tracked in your PPC account. Your account may be looking at Cost per lead (CPL) and Cost per Enquiry (CPE) to name a few, but the formula will be calculated in the same way.

Cost / Conversions = CPA

Return on ad Spend (ROAS)

You’re getting sales but you need to calculate whether your campaign is profitable, you may choose to look at your ROAS. This shows the ratio of revenue compared to the advertising spend. If you have a ROAS of two, then that means that your revenue is two times your spend.

Revenue / Cost = ROAS

Average Cost of Sale (ACOS)

If you’ve done paid advertising on Amazon, then you may have come across ACOS or Average Cost of Sale. This shows the percentage of revenue that is eaten up by advertising spend. If you have an ACOS of 30%, then that means that your cost is the same as 30% of your revenue.

Cost / Revenue = ACOS

Impressions to conversion percentage

If you want to get an idea on the percentage of times a conversion action occurs compared to the number of times your ad is shows, you would look at this metric. If you have a low impression to conversions percentage, then that may show that the quality or relevancy of keywords in the account is poor.

Conversions / Impressions = impressions to conversions %

Revenue per click

Revenue per click shows an average amount that a click is worth if you want to break even and can be used to aid bidding decisions.

Revenue / Clicks = revenue per click

Revenue per impression

Although not all impressions lead to a conversion or even a conversion, this metric shows the average amount of revenue that each impression produces. It can be used to get an idea on how much each impression is worth.

Revenue / Impressions = revenue per Impression

Average order value (AOV)

A conversion on one campaign can very different to another campaign depending on what is being sold. Average Order Value shows the average amount that is spent when a conversion occurs.

Revenue / Conversions = AOV

Impression Share

Impression Share shows the percentage of impressions that were received compared to the total amount of impressions that you could have received. Amongst other things, it can be used to aid bidding decisions by showing where more potential traffic can be obtained.

Impressions / total available impressions = Impression Share

Bid based on a CPA target

If you have a CPA target that cannot be exceeded, then you can get an idea on the maximum amount that you can bid before you start to run the risk of exceeding your CPA target. To use this formula, you would need to know, or have an idea on your CVR.

CVR * CPA Target = maximum CPA bid

Bid based on ROAS target

To prevent a campaign from achieving an unprofitable ROAS, you can use one of the below formulas to determine the maximum amount that you can bid.

(CVR * AOV) / ROAS Target = maximum ROAS bid

Bid based on ACOS target

If you’re tracking the profitability of your campaign via a maximum ACOS, then you can use the below formula to determine what is the maximum amount that you can bid before your ACOS is exceeded.

(CVR * AOV) *ACOS Target = maximum ACOS bid

Extra traffic from increasing budget to remove Lost IS (Budget)

If you have a profitable campaign that has a high impression share lost due to budget, then you’re losing potentially profitable impressions due to the campaign not having a large enough budget.

To work out how much more traffic conversions you could have received had your budget been large enough, you would start off by working out how many impressions were lost.

You can then take the current CTR, CVR and AOV, CPC to work out the missed clicks, conversions, revenue and money not spent.

Impressions * Lost IS (Budget) = Impressions lost

Impressions lost due to budget * CTR = Clicks lost

Clicks lost due to budget * CPC = money not spent

Clicks lost due to budget * CVR = Conversions lost

Conversions lost * AOV = Revenue lost

Performance if bids are increased to remove Lost IS (Rank)

Impression Share lost due to Rank occurs when bids are not set high enough. Calculating the total traffic that we would receive if we didn’t have any Lost IS (Rank) can be tricky, because it is difficult to calculate how much more we would need to bid in order to have a 0% Lost IS (Rank).

Also, by increasing bids, we would expect a better position on the page which may lead to a better CTR. Nevertheless, here is a starting point on how you can get an idea on what performance would look like if you target 0% Lost IS (Rank).

Impressions * (1 + Impression Share lost due to Rank) = Total available impressions

Old CPC * (1 + Impression Share lost due to Rank) = new CPC

Use New CPC, CVR and AOV to calculate new cost, conversions and revenue

Use ROAS and/or CPA formulas to calculate new CPA and/or ROAS

Project conversions, revenue, CPA and ROAS from clicks, CPC, CVR and AOV

To start creating projections, you may use a tool like the Google Keyword Planner. Most of these tools provide an average number of monthly searches as well as a predicted average CPC.

We can add CTR, CVR and AOV on top of this data to put together some basic projections.

Clicks * CVR = projected Conversions

CPC * Clicks = Projected Cost

Projected Conversions / Projected Cost = projected CPA

Projected Conversions * AOV = projected Revenue

Projected Revenue / Projected Cost = projected ROAS

Projections with an allocated budget

To get an idea on what performance would look like with a particular budget you can use the below as a starting point to create projections.

You start off by dividing your budget with the average CPC to work out how many clicks to expect. You can then use your CVR and AOV to work out conversions and revenue.

Budget / CPC = Clicks

Clicks * CVR = Conversions

Cost / Conversions = CPA

Conversions * AOV = Revenue

Ad rank

Google merges Quality Scores with bids to calculate an Ad Rank. The competitor in an auction with the highest Ad Rank wins the highest paid position on the page.

Quality Score * CPC = Ad Rank

New CPC if Quality Score is improved

To get an idea on how much your CPC would drop if you’re able to improve your Quality Score, you can use the below formula.

Once you have an idea on your lower CPC, you can apply the usual Impressions, CTR, CVR and AOV metrics to get an idea on what the improved performance would look like,

Current Ad Rank / new Quality Score = New CPC

Project month performance part way through the month

Often, you will need to look at performance part way through the month to see how close you are to hitting your monthly target. To do this, you could create end of month projections using the average daily performance from the last seven days.

There are a number of different methods to create. The method that you use will depend on your particular niche as using the last seven-day average to project performance may not be the best method for every niche.

To create projections for the month using the last seven days daily average, you can apply the below formula for each of the metrics that you would like to report on.

(last 7 days cost / 7) = last 7 days daily average cost

Month so far cost + (number of days remaining in month * last week daily average cost) = Monthly projected cost

Monthly CVR change due to seasonality

In a lot of niches, conversion rates can change from month to month.

To calculate the conversion rate to expect in a month, you could use last year’s data to get an idea on the conversion rate change in that month versus the month prior to it.

This percentage difference can then be applied to the conversion rate of the month prior to the month in question this year.

Current month CVR from last year / last month CVR from last year = percentage difference in CVR

Percentage difference in CVR * Last month CVR = this month’s projected CVR

Bid modifier for device/location/audience/gender/age

Using a calculated bid modifier can be a good starting to get an idea on how much to bid on a particular device, location, audience, gender or age group.

Here is a formula that will show the percentage modifier that you should apply to each segment. So, for example, if the formula 1.2, then you would apply a 20% increase on that particular segment.

If the formula outputs 0.75, then you would apply a 25% reduced bid modifier on that segment.

Specific segment CVR / Total CVR = percentage bid adjustment for specific segment