Often clients or prospective clients will ask me this question. They want to know how high the bids are for their industry, or how much they will pay per lead, or how high their budget needs to be, or what we charge for our services to set up and manage a pay per click account on Google, Yahoo, MSN or Facebook.

I wish there was a cut and dry way to answer this question, but there isn’t. But I can explain how pay per click advertising works, and together we can arrive at an answer.

The first thing to know is that an advertiser bids a certain dollar amount that they are willing to pay every time a searcher clicks on their ad. Let’s say you bid $1.00. That means that the maximum amount you will pay when someone clicks on your pay per click ad is $1.00. The actual amount will vary somewhat and will usually be a little less than that.

Now that you have bid $1.00 for that keyword, what happens next? Well, there are almost always other companies competing for that keyword. In other words, when someone types in that keyword on Google let’s say, you will see a variety of sponsored ads come up for other companies. Each one of those companies has set their maximum bid amount that they are willing to spend for that keyword.

So if you have set your max bid amount at $1.00, and there are four other competitors and they have set their max bids at $0.90, $0.80, and $.075, your ad will appear in the first position. There are other factors that determine this other than the bid, but for the most part the bid will determine whether your ad comes up in the 1st, 2nd, 3rd, 4th, 5th, or 27th position.

And your ad’s position, to a large extent determines how many people are going to click on your ad, which is called the clickthrough rate. You don’t have to be in the number one position to get people to click through on your ad, but generally the ads at or near the top get the most clickthroughs.

So as an advertiser you want to pay as little as possible for your clickthroughs. BUT, if other advertisers are already bidding high, you will need to bid higher for that keyword if you even want your ad to be seen. Because if there are more than 10 advertisers for a given keyword, and for many keywords there are, if your bid is really low your ad won’t even appear on the first page (and that means you will get no or virtually no clickthroughs).

So how do you know what the other people are bidding? That will determine how high you have to bid, right? That will tell you whether it is even going to be viable to advertise on a given keyword.

Unfortunately there is no exact way to tell before you set up a campaign, what other people are bidding for a specific keyword. Yahoo used to offer a tool that showed you the exact bids on any keyword, but they took that away over a year ago.

Now Google offers a tool within their interface called the “Traffic Estimator,” where you can enter your keyword or a list of keywords, and try different bids, and it will estimate the number clickthroughs you’ll get at various levels. The Google Traffic Estimator will give you an idea of how high you will need to bid, but it won’t give you an exact idea.

The only way you get an exact idea of how high you need to bid is to start a campaign on Google or one of the other providers. After a week you will know. Because you will put up a campaign, check it after a day or so and see what happens. Google will show you the average position of your ad. If your average position is 1 or 2, then your bid is fine. But if your average position is 8 or 9 or 27, or if the keyword interface shows that your ad is not appearing on page one, then you need to raise your bids. You should check your campaign every day or so for the first week, and adjust your bids according to what you see. Then you’ll know after a week or so how high you have to bid.

I have seen campaigns where a client was able to bid 25 cents for a group of keywords and get traffic at that level. But that’s rare today. Some campaigns you can bid $1.00 to $2.00 (and I almost always start out with a bid of $1.00 or $2.00). But some campaigns, due to extremely high competition for those keywords, you will need to bid $5.00, $10.00 or even more. Different sectors of the home improvement industry are especially competitive at this time.

The best thing is to start up a campaign and monitor it closely for a week. Then you’ll have a really good idea.

Cost Per Lead

The cost per lead is something you can track very carefully with Google, and this is one of the things that determines whether your campaign is viable or not. The cost per lead depends on two factors:

a. The bid
b. The conversion ratio

Obviously if you have to bid higher for a given keyword or group of keywords, your cost per lead is going to be higher. But then when someone lands on the page of your site, the next factor is how well you close them to do what you want them to do. This is the conversion factor, i.e. what percentage of people landing on that page do the desired action? With a lead generation campaign, you are trying to close them to fill out the lead form on the web page or call you and become a lead. When you are selling a product online, you want to close them to buy the product right now.

I have seen campaigns with a cost per lead as low as $10 (one just recently). I have seen other campaigns with a cost per lead as high as $150, and where the company was very happy with that. With lead generation campaigns, including both form reaches and phone calls, most campaigns can get a cost per lead of $30 to $80. Whether the cost per lead is viable depends on what your sales closing percentage is, and your average dollar amount of sale.

Once you know what your bid level is, and your approximate cost per lead, you can decide how many leads you want to get from pay per click, then set your monthly budget accordingly.

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John Eberhard is President of RealWebMarketing.net (http://www.realwebmarketing.net). You can read his Real Web Marketing Blog at http://www.realwebmarketingblog.com. He is also the author of the eBook "Making Money with a Web Site, The Basics of Internet Marketing Part 1," which you can see at http://www.realwebmarketing.net/ebook1/