If you have been driving traffic with PPC ads for your local service business – great job!
But…
Do you know how much you’re spending on acquiring each lead?
After all, if you’re spending more on acquiring leads than the profit you generate from those leads – you’re losing money!
Thankfully, Google can help you control how much you spend on lead acquisition using machine learning technology to make sure that your PPC ad campaigns are profitable.
This smart bidding strategy is based on the concept of cost-per-acquisition (CPA) and we’ll show you how local service businesses can best leverage this feature.
What’s Cost per Acquisition (CPA)?
As a marketing concept that calculates the cost of acquiring new customers, CPA helps you determine if your PPC ads are attracting and retaining customers profitably so you can maintain a healthy ROI.
For many small businesses without sales people and the associated overhead, CPA is proportional to lead cost. Lead cost is the amount one pays for leads. If you win 1 in 3 leads, your close rate is 33%, and without sales overhead, your CPA would be 3 times your lead cost.
For instance, if you are a painting company and your average lead cost is $40, and you close 1 in 4 leads, then your CPA is 4 x $40 or $160. Each job you win costs you an average of $160.
How To Determine Your CPA?
Start with your average transaction value, which is the gross revenue you generate from each sale. Subtract the cost of delivering the service and fixed costs involved in running your business (excluding ad spending) from the gross revenue to get the gross profit before advertising.
Next, determine how much net profit you want to make from each transaction. Subtract this number from the gross profit and you’ll get the maximum CPA you should target for acquiring a new customer.
Keep in mind that some factors may affect this final target cost per acquisition (TCPA). For example:
- If you have a high customer retention rate and high customer lifetime value, you may be able to afford a higher TCPA for the initial transaction so you can stay competitive and get the right customers in the door.
- Your TCPA can vary based on the service area or type of service. Also, some customer segments may convert more easily so the cost associated with selling to the different prospects may vary.
Applying TCPA To Your PPC Ads
Thanks to Google Ad’s Target CPA bidding feature, you can easily set TCPA for your PPC ad campaigns. Here’s what you need to know:
What’s Target Cost Per Acquisition Bidding?
Formerly called Conversion Optimizer, this is a smart bidding strategy within the Google Ad platform that optimizes bids so you can get as many conversions for the TCPA you set for your campaigns.
You can determine the conversion event (e.g., a click, a request for a quote, a purchase) and set the TCPA as a standard strategy for a single campaign or a portfolio strategy for multiple campaigns.
Google’s machine learning technology uses historical data from past campaigns and combines it with contextual signals present at the auction time (e.g., the user’s location, type of device, remarketing list, time of the day, etc.) to determine the optimal cost-per-click (CPC) bid based on your TCPA.
Setting TCPA In Google Ads
If you have historical conversion data from past campaigns (at least 15 conversions in the past 30 days,) Google Ads will make a recommendation on TCPA, which is calculated based on the actual CPA performance during the previous few weeks.
Here are some bid settings you’ll encounter as you’re setting up your campaign:
- Bid limits: for most advertisers, Google doesn’t recommend setting a bid limit because it can restrict the platform’s automatic optimization of your bid. It could prevent Google Ads from adjusting your bid for each auction to the amount that best meets your TCPA. However, if you have a limited ad budget, you can set maximum and minimum bid limits to avoid overspending. This feature is only available for portfolio level use.
- Device bid adjustment: you can prioritize conversion by setting adjustments for desktop, tablet, and mobile devices. For example, if you want to prioritize spending on mobile searches, you can set a bid adjustment to +30% — in this case, if your TCPA for the campaign is $10, it’ll be raised to $13 on mobile devices.
- Pay for conversions: use this setting if you want to pay for conversions, instead of clicks, in your Target CPA bidding. You’ll only pay when visitors convert on your website or app.
Your TCPA can influence the number of conversions you get from the campaigns. For example, if you set the number too low, you could be shown on fewer search result pages and miss out on clicks that could lead to conversion.
To gauge whether your TCPA is performing optimally, you can review a campaign’s performance using the Target CPA Simulator, which shows you how an ad could have performed if the TCPA was set differently.
A Few Things To Know When Using TCPA Bidding
Since Google Ads determines your TCPA based on historical data, make sure that your conversion tracking is set up correctly. Otherwise, the data won’t be accurate and this will likely affect your TCPA bidding.
In addition, you should have accumulated a good number of conversions (e.g., 30 to 50) for Google to accurately estimate your TCPA.
If you’re just getting started, set realistic initial goals so you don’t limit the auctions you can enter. For example, if your average CPA is $50 in the past few months, setting your TCPA at $25 is likely to be too low and prevents you from taking full advantage of the smart bidding feature.
Also, note that you’ll probably go through a learning phase during the first two to four weeks. Setting a slightly higher TCPA can give you some room to find your footing and then you can bring it back down to your goal TCPA.
Using TCPA Bidding For Your Local Service Business
There are some nuances when it comes to using TCPA bidding for your local service business.
Let’s say a carpet cleaner wants to advertise for his various offerings, such as carpet cleaning, rug cleaning, and upholstery cleaning, which may have different margins and cost associated with delivering the service. Also, certain towns may be more profitable, due to factors such as a shorter travel distance or larger average job size.
As such, the carpet cleaner may be willing to pay $35 for carpet cleaning leads but only $25 for upholstery cleaning. Meanwhile, he may be able to afford a higher CPA for town A than town B.
In this case, the carpet cleaner can set TCPA for carpet cleaning leads at $40 for town A and $30 for town B so he can stay competitive in each location without spending unnecessary ad dollars.
The Biggest TCPA Challenge For Local Service Business
As we discussed earlier, Google needs the right conversion data to recommend optimal TCPA.
This is technically more challenging for local service businesses thanks to the often-complicated buyer’s journey. For example, most prospects would click on a PPC ad, visit the website, and then call to make an appointment.
As such, more clicks than Google recorded have likely turned into leads. If you don’t provide that conversion information to Google, the recommended TCPA can’t be optimized properly.
99 Calls has devised a specific solution to help contractors accurately track conversion (i.e., clicks turning into leads) and supply the data to Google Ads.
Our system is set up to track each click and call, match them up, and then mark clicks that have turned into qualified leads on Google as a conversion. This allows Google to learn how to get more clicks that are most likely to turn into leads.
In addition, 99 Calls can run Google Ads campaigns to target a specific lead price, a specific ROAS (return on ad spend,) or simply get as many leads as possible for a given budget – depending on your business objectives.
See how we can help you optimize your PPC campaigns here.