I just watched this youtube video from the Chief Economist, Hal Varian, who explains some fundamental profitability terms in a surprisingly “non-economist” fashion. By this I mean it’s relatively easy to understand. If you can get past all the acronym-induced confusion and fear of percentages, you’ll find this video particularly helpful when it comes to thinking about how much of a return you’re getting from AdWords. Perhaps more importantly, it’ll help you think through bidding strategy with a sense of direction.
In the first part, he discusses how to find your Value Per Click, and how that can guide you towards a profitable bidding price.
In the second part, he explains how to find Incremental Cost Per Click, and how this can deliver an optimal bidding strategy for gaining the most profit.