A good rule of thumb to determine your initial bid is as follows:

Assume average conversion rate: 1% = 0.01 (5%-10% for pay per lead)

Let’s say your commission payout is : $20

Then a good place for you to start bidding 1% x $20 = 0.01 x $20

This is because the conversion rate times the commission (affiliate payout) = EPC (earnings per click)

So if your bid = EPC you’re breaking even then you can optimise your campaign to hit profit…

Ideally you need to KNOW your EPC or your conversion rate for ppc traffic which you can get from your affiliate manager.

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Checkout Adcenter Labs here: MSN Adlab

Loads of cool tools here but one that looks very interesting is ‘Detecting Online Commercial Intention’

Microsoft adCenter can detect your customers’ intention to purchase products or acquire information. For example, if a customer searches for “canon digital camera”, it is likely that he or she wants to purchase a canon digital camera; therefore, the online commercial intention is strong, with a confidence level bigger than 0.5. Webpage searches display two levels of commercial intention: informational and transactional.

Check it out, from my keyword data / sales looks pretty accurate….

You can work this out using the following basic formula:

Avg Basket Size x Avg Conversion rate = Avg Sales Per Hundred Clicks x Affiliate Commission = Avg Earnings Per Hundred Clicks

ie. Your merchant pays 10% commission & has an avg. basket of £50 & a 10% conversion rate.

This means for every 100 clicks you will earn £50, so if each click were to cost you 20p:

100 clicks x 20p = £20 in PPC charges

£50 comm – £20 PPC costs = £30 profit per 100 clicks.

Using the above formula you can roughly work out if the merchant is paying enough commission in comparison to the cost per click for that markets keywords .