The bid calculator uses historical conversion data and a target cost per acquisition (CPA) to predict what your conversion rate will be, and therefore what you should pay for a visit to your site.
Topics covered on this page:
- What historical data should I use?
- What are conversions?
- What are clicks?
- What is Target CPA?
- What does confidence percent mean?
- Why is my conversion rate shown as a range?
- What is the conversion-to-click ratio?
- Why is my recommended bid shown as a range?
- What is the optimal bid based on conv/click ratio?
- Which bid should I use?
- How is the confidence interval calculated?
- How is the recommended bid calculated?
What historical data should I use? It’s up to you, really. You can use the tool to get a better feel for the value of all traffic to your site, or to determine optimal bids for a specific Facebook or Google AdWords campaign. In general, more data is better when it comes to making predictions, so using six months’ worth of data will produce a more useful result than one months’. But the calculator will tell you if you are providing enough data to generate a useful range. If it recommends a big bid range, you should look at increasing the scope or time range of your data. top
What are conversions? A conversion can be any action that represents value to your business. Examples of actions people track as conversions include: purchases, ‘contact us’ inquiries, account creation, Facebook likes and phone calls. The two important qualities of a conversion are:
- It is something you can track.
- It is something you can put a value to. This is very important, because otherwise you can’t come up with a target CPA. The value doesn’t have to be exact, for example, many business have an estimated value for Facebook likes. A Facebook like itself doesn’t have any inherent value, but it is seen as valuable because it implies a closer connection with consumers. top
What are clicks? If you are optimizing Google ads, Facebook ads, or another form of advertising, a clicks is what is reported by the vendor, e.g. Google AdWords will tell you exactly how many clicks you paid for last month. If you are trying to understand the value of visits to your site overall, you can use visits for this value. top
What is Target CPA? Target CPA is the maximum you would like to pay for the action you have defined as a conversion. For example, you may be willing to pay up to $5 to get a phone call to your business. We say “target” rather than “maximum” because in advertising you are generally looking to get as much business as you can, as long as it’s profitable. By paying more, your ads generally get more impressions or have greater reach, which translates to more leads. top
What does confidence percent mean? Confidence percent is a concept from probability, and describes how confident I am of an estimation. For example, I may say that I am 90% sure that I will run a race in less than an hour. Predicting conversion rates works the same way. I can never know exactly what my conversion rate will be, I can just say that I am X% sure that it will fall between Y% and Z%. In this example, X is the confidence percent. For more on this topic, see the article: Paid Search: Bidding with Confidence top
Why is my conversion rate shown as a range? Because you can never know exactly what your conversion rate will be, you can only predict that it will fall in a certain range. This gets at the same principles described above regarding confidence percent, and in the article: Paid Search: Bidding with Confidence top
What is the conversion-to-click ratio? This is the ratio between the conversions and clicks you enter in to the form. Many people would look at this as your conversion rate, but we are calling it the conversion-to-click ratio to differentiate it from what we are really after, which is your predicted conversion rate. top
Why is my recommended bid shown as a range? Because your recommended bid is based on your target CPA and conversion rate, which is also shown as a range. For more on the relationship between these factors, see our article: Paid Search: Bidding Based on ROI top
What is the optimal bid based on conv/click ratio? This is the bid required to achieve your target CPA, assuming your conversion rate stays exactly the same as the conversion-to-click ratio you entered. This is an ok, middle-of-the-road approach if you have a lot of data to work with, but if your conversion rate range is large, the conv/click ratio isn’t very meaningful. top
Which bid should I use? It really depends. If the calculator produces a wide range, you probably don’t have enough data to make a good decision. We like to think of it this way: the range tells you that you shouldn’t be bidding less than the low bid and more than the high bid, but other factors influence where you should fall in between. If you want to be really careful with your budget, bidding on the low end makes sense. On the other hand, if you want to be more aggressive with your bidding, the high end makes sense. The other benefit of bidding high is that you collect more data quickly, and be better able to make decisions. top
How is the confidence interval calculated? We use the Adjusted Wald equation for calculating intervals, and treat conversions as random events with binomial probability. We’ve found that the Adjusted Wald equation handles small data sets better than other approximation formulae. If you’d like a more detailed explanation, please contact us. top
If you have a question that hasn’t been answered here, please ask it in the comments below or email it to us!