Some businesses that sell services on Google AdWords may find Cost per Acquisition (CPA) a helpful metric to determine if a Google AdWords program is working for them. In the case of CPA you will evaluate a number of metrics to determine what will be profitable for bidding in AdWords.
“Each time a user who clicks on your ad completes one of these goals, they’ve given you a new conversion. You should be able to attribute a value to each of these conversions. For example, you may sell digital cameras on your site for US$300. Let’s assume that each camera has an additional wholesale cost of US$200 to you. Therefore, a conversion for a user who buys a camera on your site generates US$100 of revenue for you. This amount is the price the user paid (US$300) minus the cost to you (US$200). The US$100 revenue is your maximum profitable cost-per-acquisition, or CPA. You can pay up to US$100 for each conversion and still make a profit on the sale.”
Understanding your conversion rate is the next step to be able to extrapolate on the average what you should bid per click to stay within your goal cost per acquisition to maintain profitability. If your conversion rate is 2.0% that means that for every 100 clicks 2 people will actually buy your product. If each sale generated $100 of profit each or a total of $200 in profit, you need to be spending under $2 a click to show a profit in your AdWords program.
If instead each acquisition you make is for a new client who will typically spend $30,000 over the effective lifetime of their use of your services, then your investment in Google AdWords takes on whole new approach. You will be willing to spend more to advertise to earn that client who will in turn spend more with you over the course of several years.