When advertising on Google Adwords, it is essential to get the maths right, or you can end up loosing money on it very quickly.

I’m no expert, but this is what I’ve come up with:
1) bid on several hundred keywords at 0.03p each, and let google cancel the ones that are over competitive. This normally creates a spike and a rapid tail
off of visitors, so the success of this plan can only be seen after a few days.
I found that this bottom-feeding approach brings in cheap traffic, but not much of it.

2) Pay the maximum you can afford to bring in as many visitors as possible, whilst making sure the cost per conversion does not exceed nor equal your average profit per conversion.

Google is unusual in the sense of the more visitors you purchase, the higher the cost per visitor gets. Economies of scale are somewhat reversed in this situation. However, if you make £1 a conversion, and it costs 50p per conversion for 1,000 visitors, or 40p a conversion for 100 visitors, then you are still better paying £500 for £1000 profit than £40 for £100 profit.

To calculate your maximim CPA (Cost per Action), then it is take a specific period, i.e. January 2010, say P is your gross profit in January 2010, C is your cost of sales, N is the number of conversions in Jan ’10. Then your Maximum CPA is (P-C)/N

Now, not every click on an ad will result in a conversion, depending on the ticket value of your product, this could be anything from 1% to 50%. Check your conversion rate bettween your visitors (V) and conversions (N) , then divide this into your  Max CPA i.e. CPA x N/V to get your Max CPC.

Interestingly, combining both equations nullifies your conversion rate: (P-C)/V – But you’ll still need to have your Max CPA to hand to ensure that no individual keyword exceeds your MAX CPA.