1. Calculate the Conversion Rate From Clicks To Sales
The Bidder looks at the past months of data on the Keyword and figures out how many clicks it takes to typically get a sale. This is called the Conversion Rate. If it takes 100 clicks to get 1 sale, then the Conversion Rate is 1%.
2. Calculate the Available Ad Spend Per Order
The Bidder uses the ACOS Target and the average revenue per order to determine how much it can spend on clicks to get a sale. If there’s an ACOS Target of 20%, sales of 100 units that make $10,000 in revenue, then the Available Ad Spend Per Order is $20 (i.e. $10,000/100 * 20%). The Bidder knows it must spend no more than $20 on clicks per order.
Your ACOS Target tells the Bidder how much of your sale price you’re willing to spend on buying ads. The higher your target, the higher the budget the Bidder has to spend on clicks and the higher it will make bids.
3. Calculate the Cost-Per-Click And Set The Bid
Once we know how much you’re willing to spend on ads per sale, and we know how many clicks it takes to get a sale, the Bidder figures out your Cost-Per-Click. In the examples above it multiplies the Conversion Rate by the Available Ad Budget which is $20 * 1% = $0.20. The Bidder then sets the bid to the calculated Cost-Per-Click.