## This post is all about marginal cost. What is it, how it’s calculated, and most important, how understanding it helps you maximize your profits.

The first thing to understand is the difference between ROI and Maximum Profit.

(Consider the fact that every time I use the term ROI, I actually mean ROAS – Return of Ad Spent. Yet, within the boundaries of our discussion, both should be treated the same)

### Max Profit vs. Max ROI (ROAS)

Maximum profit and maximum ROI are two completely different terms (and goals) that are too often confused one with the other. Yes, they’re both related to your revenue, but that’s where the similarity between them ends.

Your ROI indicates how much you got back (or earned) from every dollar (or euro or any other 1-something) you spent, and therefor does not refer to your ad spent (displayed as percentage). On the other hand, profit takes everything under consideration and gives you a final number that represents your total income minus your ad spent.

Quick tip: To check your calculations, total profit is also the result of your (ad spent times your ROAS) minus your ad spend.

### Calculating ROI

There are 2 different ways to calculate ROI. The main difference between them is their lowest possible value:

**{Total income / Total ad spent}**– this method is the simplest and most common amongst marketers. It tells you how much you got back from every dollar you spent. If you spent 100 USD and got nothing back, you can say that you got 0 dollars for every dollar spent. The minimum possible value here is 0, and breakeven is 1. This value’s real name is ROAS – Return on ad spent.**{(Total income – Ad spent) / Ad spent}**– this method is the “by the book” method. This is the annoying method that everybody should use when they speak about ROI, but only few does (luckily). This number shows you how much money you gained or lost for every dollar spent. Here, the minimum possible value is -1 and breakeven is 0 (this is the source of the terms positive and negative ROI)

### Getting down do business: Calculating Marginal Cost per Lead

Let’s take a situation where your CPL is pretty stable.

You know that the maximum amount of leads (per day) you can get for 5$ is 10.

If you’ll increase the bid you’ll get more leads but for a higher CPL.

Your ROI is around 2 when your CPL is 5, meaning that every lead worth to you 10$ (and every lead that costs more than 10$ make you lose money – CPL*ROI).

If you’ll increase the bid by 60% you will be able to double the amount of leads you get, so after the bid change you have 20 leads for CPL of 8. Still profitable, right?

Let’s check which situation was better:

1. 10 leads for 5$, generating you an income of 100$ in total cost of 50$.

2. 20 leads for 8$, generating you an income of 200$ it total cost of 160$.

The definition of marginal cost is the amount of money you paid for the **LAST** lead, so…

{(Total cost after increasing the bid-Total original cost) / (Leads after increasing the bid – No. of original leads)} = (160-50) / (20-10) =110/10=11$.

For every lead after the first 10 we paid 11$ and even though it looks like we paid 8$ and still made profit, we actually lost 1$ for every lead after the 10^{th}.

You can see for yourself that the first situation was better for you. You spent 110$ less and earned 10$ more.

Higher ROI doesn’t necessarily means higher profits. Higher ROI with lower spend (like it often happens after decreasing your bids) might hurt your profits. Example: it is better to spend 10K per day with ROI of 2 (every Dollar you spent generates a revenue of 2 USD) than to spend 600USD with ROI of 6. Do the math and see for yourself.

### How to Increase Bids And When to Stop?

If you ever read any of my posts, you already know that there’s a calculation involved. But, unfortunately, on this one you’re gonna have to do some tests in order to find the amount of traffic you get for every bid. In order to start the testing, we need to set a “ground zero”, which is your current status.

Now, increase the bid (preferably by up to 5%) and check how much extra traffic you got (like we did in the example earlier, just make sure to consider your IS and average position. Sometimes there’s no point in increasing the bid.). Calculate the CPL for the extra traffic and make sure that you’re still positive. If you are still profitable, keep increasing the bid until your marginal CPL is breaking even with your income per lead. When you reach this point, start decreasing your bid slowly (slower than the raising rate). The moment you become positive again, know that you’ve done what almost no PPC Expert has done before – you found the critical point. This is the most profitable point.

Things to pay attention to:

- This can be done in almost every level, but preferably – do it in the keyword level (or in the lowest targeting criteria you used in the GDN)
- make sure to compare your data from AdWords to data from your CRM
- Know the differences between days, some campaigns are more active in the weekends and some during the week. Increasing or lowering the bids is a long process. In order to know exactly what every bid change has done, I usually wait a week between changes.
- Your campaign is not static and it changes every single moment. After finding the critical point, keep experimenting with different bids.
- In one of my previous posts, I explained when you should or shouldn’t increase your bid to get more traffic. In every bid change, consider your Impression Share Lost (Rank) and Avg. Position.
- Increasing and decreasing bids for thousands of keywords every single time can drive you mad… Use labels to mark every keyword’s status.
- Excel is your best friend. Use excel formulas to automate your bidding (if you need help, don’t hesitate to ask in the comments).

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