Inflation continues to weigh heavily on consumers and businesses alike. Retailers nationwide face squeezed profit margins due to rising wages and material costs.
Businesses must invest in advertising to stay competitive, yet these expenses are also climbing. Over the past three quarters of 2024, Google reports that cost-per-click (CPC) rates have risen by 4 to 6% year over year, adding to the financial strain.
Ordinarily, businesses might respond to rising CPC costs by increasing prices. However, with inflation-weary consumers already feeling the pinch, price hikes could push customers away.
What options remain for businesses? Fortunately, there’s a smart solution: implementing CPC caps. This strategy allows businesses to offset rising ad costs without burdening consumers.
Analyzing the mechanics of Google’s CPC rates
PPC advertisers using Google’s smart bidding technology leave themselves at the mercy of Google’s AI function. Here’s an example of how that works:
Imagine a business targeting a four-times return-on-ad-spend (ROAS) with an average order value (AOV) of $200.
If Google’s “all-knowing” AI is 100% certain that a consumer will convert, the maximum price they can charge for that click is $50.
While that may seem like a lot for a click, over time, Google has learned the businesses’ habits and, therefore, knows what its clicks are worth, thus charging them that amount.
Fortunately, Google’s AI isn’t actually all-knowing (yet). So, we should ask ourselves not how much the click is worth but what it costs to win high-value clicks.
If I can enter the same auction and win the same click for just $20, that’s an improvement. While I aim for a four-times ROAS at $20, I achieve a ten-times rate of return.
This reveals that Google’s overconfidence can sometimes lead to extraordinarily high click prices, which don’t align with business objectives, as seen in this example of a $648.94 click without a conversion:
For further context, before implementing CPC caps, I analyzed several clients’ generic (non-brand) campaigns.
The data consistently showed higher returns in each case when CPC rates were at the lower end of the spectrum. This trend underscores the potential benefits of setting CPC caps to optimize campaign performance.
The analysis showed that while the “waste” for some clients was relatively low (less than half a percent), some clients were “wasting” considerable portions of their budgets at returns well below the average.
Note that some paid search experts object to this kind of analysis. They argue that cutting the $1,500 from Client 5 on clicks above $2.50 won’t help performance because there is nowhere else for that $1,500 to go.
Fortunately, we have evidence that this isn’t the case.
In the above example of a generic search, the client set a cap of $10. This eliminated an admittedly small but wasteful portion of the spend. Even better, overall campaign performance improved.