The best business in the world is useless if no one knows about it
You may have developed an incredible product or service. You may have written a foolproof business plan. You may even have your finances in order. But if no one ever hears about your business, you've failed before you've even begun.
That's where marketing comes in. A good marketing strategy will set your startup up for success, and the lack of a plan is nearly certain to sink you. So read on to find out how to market your startup.
Why do you need a marketing strategy?
A good marketing plan is your way of reaching your target customers and making them aware of your brand. It puts you in touch with your customers' needs, and allows you to communicate your unique way of addressing those needs.
Regardless of the size of your business, marketing is an essential part of your business strategy. And you need a well-developed marketing strategy in order to measure your impact and determine the return on your investment.
With this in mind, your marketing needs to be well-defined, targeted and measurable. It's worth investing money in marketing, but first you have to determine how much to invest, and where.
How much should you pay to acquire a customer?
There's an oft-repeated quote from marketing legend Dan Kennedy: "The business that can spend the most to acquire a customer wins." There's a lot of truth to this statement. The more you can spend to market your product, the more customers you'll bring in.
But how do you know how much you can spend to acquire a customer? This metric is known as your Customer Acquisition Cost, or CAC, and you'll need to figure this out before you begin your marketing efforts.
We've broken the process down into a handy worksheet you can use to determine your CAC.
Figure 1: Calculating Customer Acquisition Cost
A sidenote before we begin: As your startup grows and matures, there's an argument to be made for focusing more on customer retention than acquisition. But before that argument can be made, you have to actually have customers to retain. So we'll focus our efforts on the cost of acquisition.
How to calculate lifetime value
Before you can determine how much you can spend to acquire a new customer, you need to know each customer's lifetime value (LTV). It's rare that a customer purchases just one product from you, or uses your service only once. So that initial sale doesn't represent the end of a customer's value to your business.
If you're a startup, it's likely you don't have the customer data to determine LTV. That's OK. Generally, industry benchmarks would put LTV at between 2 times and 8 times the cost of your initial product or service. For instance, if you're charging $100 for your product, customer LTV would be $200–800. We suggest taking an average of this and assuming a multiple of 5.
Next you'll want to account for products that get returned that require you to offer a refund. A conservative estimate here would be about 7%. So in our scenario of an LTV of $500, we subtract 7%, or $35, to get a final customer LTV of $465.
If you're a subscription-based service, this gets a bit trickier. You can calculate customer LTV by looking at your churn rate. Your churn rate is the percentage of customers who will cancel their subscription. Again, if you're a startup you won't have preexisting data on this. So let's go with the industry standard for subscription models, which is 5–7%. For the sake of illustration (and the ease of math), we'll take the optimistic figure of 5%.
Once you've determined your churn rate, you look at the average revenue per account (APRA), which is the amount an account generates over a specified period of time such as a month. In other words, your subscription price.
Once you know your churn rate and your APRA, you determine the lifespan of a customer by dividing 1 by the churn rate. In our example of a 5% churn rate, you end up with 20. In other words, the average lifespan of a customer is 20 months.
To calculate LTV, simply multiply this by your APRA. If your subscription price is $150 per month and your average customer stays with you for 20 months, your customer LTV is $3,000.
Subtract your costs
Once you know the LTV of a customer, you need to subtract your costs. This includes both the cost to make and deliver your product and the cost of your business overheads.
Let's say, again for ease of math, that it costs $20 to manufacture and deliver your product. Assuming a customer buys 5 products from you for an LTV of $500, subtract $100. You now have $400 left to spend to acquire your customer.
But we're not done. You also have to look at your overheads. These are costs like rent, utilities, inventory and payroll.
Now here's where it gets tricky. You have to figure out your overhead cost per unit. In other words, for every product you sell, how much are you paying in overheads?
First, determine your annual overheads. If you've read our chapter on financing your business, you should have a good idea. If you haven't, go back and read it now.
Next, estimate your monthly sales and multiply by 12 to get your annual sales. Even if you haven't made any sales yet, if you've written up your business plan and financial projections you should have a good estimate.
So let's assume your overheads are $100,000 for your first year (although we've mentioned before, we're big fans of keeping your operation lean). You've estimated monthly sales of 1,000 units for annual sales of 12,000 units. Now divide that by your overhead costs, and you get a cost per unit of $8.33. If customer LTV is 5 units, that's $41.67 in overheads over the life of a customer.
So in our example above, after deducting manufacturing and delivery costs from your LTV, you're left with $400. Deducting overheads, you're left with $358.33.
OK, so that gives you $358.33 to spend on acquiring a customer, right? Not so fast. Now you have to actually turn a profit.
Determining profitability
The profit you make per customer is entirely up to you. It's your business, after all. But you have to determine the profit you want per unit before determining how much you can spend to acquire a customer.
For a digital product, a profit margin of 20–40% is healthy. For a physical product, the margin could be lower. Just remember that every dollar you take in profit is a dollar that can't be used to acquire new customers.
But let's assume you're selling a digital product, and you decide on a profit margin of 30%. Multiplying customer LTV of $500 by 30%, we get $150. That's how much profit you want per customer. Now deduct this from your $358.33 and you're left with $208.33. And that's how much you can afford to spend to acquire a new customer.
What elements does your marketing strategy need?
So now that you know how much you can spend to acquire a new customer, you have to decide how to allocate those dollars. It's likely you'll want to split them up between inbound marketing and outbound marketing.
Inbound marketing
Inbound marketing is marketing that brings customers to you via content that they want to consume. It's offering something of value to customers, and using that value to draw them to your product or service.
Content marketing
A lot of inbound marketing could easily fall under the umbrella of content marketing. For our purposes, though, we'll discuss content marketing as it relates to content that lives on your website's blog.
You are planning on a blog, aren't you? If not, you absolutely should. A blog gives you the opportunity to set yourself apart as an industry expert, a voice of authority in your field.
A good blog shouldn't be about making a sales pitch for your product. It should draw people to your website because it offers valuable information. You can use your blog to link to your service pages where you actually convert customers. But the primary purpose of your blog is to draw visitors in by offering them something of value.
You can read our guide for more about
why you need a blog and how to create a great one. But the long and short of it is this: create a blog on your site and post regularly. Post about your area of expertise. If you're starting a business, you're already an authority in the market you're servicing. Leverage off that.
So how do you decide what to write about? The key is to answer questions people are already asking and provide solutions to problems people have. There are a few ways you can determine this.
Your first step will be to do keyword research. Keywords are the words and phrases people are typing into search engines. You can use a free tool like
keywordtool.io. Simply head to the site and type in a topic. You'll receive a list of keyword ideas based on the topic, and this will give you a good idea of the subjects you should cover.
Next, head to
AnswerThePublic. Here you can type in a topic and receive a list of questions people ask about that topic. Write blog posts that answer these questions.
If you're producing content of value that offers answers to common questions and solves problems, people will take notice.
But your blog doesn't have to be limited to written content. You can also produce content like infographics, quizzes, white papers and
e-books to deliver content in different formats. Spend time on your content, and if you don't have time to produce content that's more comprehensive, informative and engaging than anything else on the internet on a particular subject, consider hiring a
freelancer to do it for you.
Social media marketing
With more than 3.5 billion active users, social media platforms are an enormous opportunity for businesses. Each social platform has its own unique character, and different types of content perform best on different platforms. Here's a rundown of some of the top platforms:
Facebook:
Facebook is tough for organic results. Unless people follow your company's page, it's difficult to appear organically in their newsfeed. However, a good business page should include your contact info, an eye-catching cover photo, a profile photo of your logo and a call-to-action button leading people to your website.
Visual content does best on Facebook, and video performs well. Consider offering your followers glimpses behind the scenes at your business. Interactive content like quizzes also perform well.
Twitter:
Twitter users are very active, with
46% using the platform daily. Again, visual content performs well. Use your Twitter to link to useful content. You should also capitalize on its strength as a customer service platform. Just remember to respond to all customer service queries promptly.
LinkedIn:
LinkedIn is all about business. This is the platform to connect with other influencers in your industry, and position yourself as an authority. You can use LinkedIn to post original long-form content that offers business insight. List-based articles perform well, as does video.
LinkedIn is a great platform for your business if your product or service is in the B2B market. For B2C companies, LinkedIn is less effective.
Instagram:
Instagram is all about the visuals. While around
80% of Instagram's users follow at least one business, you won't achieve success by pushing sales. Instagram users want to engage with beautiful imagery, particularly aspirational lifestyle imagery. This is also a great platform to offer a behind the scenes look at your business.
Pinterest: While
Pinterest might not have the largest audience among the social media platforms, it has the audience with the highest buying intent. Pinterest users are there to get purchasing ideas. If you have a product or service that lends itself to a visual medium, Pinterest is a great platform for you. For more esoteric services, think about creating infographic content that links back to your site.
Search Engine Optimization (SEO)
Search engine optimization, or SEO, is the process of optimizing your content to be found through search on platforms like Google and Bing. It's ensuring that people searching for certain terms find your website in the search results.
Why you need SEO
SEO is crucial because it allows people to discover your website and content. You could have the most insightful, useful content on the internet, but that's little help if no one can find it. 93% of all internet sessions
begin with search. SEO helps ensure those sessions that begin with search terms relating to your industry end on your website.
On-page SEO
On-page SEO refers to any action you take on a web page to improve its ranking in search results. It encompasses a discipline called technical SEO, but we'll discuss that separately.
Where content is concerned, on-page SEO means making sure your content is in the best position to rank for the search terms you want it ranking for. The best way to do this is to create the best, most comprehensive content on any subject you tackle.
As we stated before, look for the questions people are already asking. Answer those questions thoroughly and make sure you include the relevant keywords. Look at the pieces of content that are already ranking for the search terms you're targeting, and then make sure the piece of content you produce is more comprehensive.
Off-page SEO
Off-page SEO, as the term suggests, is any action you take outside of the page of content you produce to promote it in the search results. The most productive off-page SEO task you can undertake is link building.
Link building is the process of getting other sites to link to your content. There are a number of ways to go about this, but at its core,
link building is all about business development.
You should work to build relationships with other content creators in industries adjacent to yours. Offer them content that could have value to their audience, and ask them to link back to it. Every link you get is viewed by Google as a vote of confidence.
A great way to get links is to produce original research. You can put this in the form of an infographic or a blog post and share it with others in your field. Orbit Media co-founder Andy Crestodina recommends asking yourself, "What do people in our industry often say, but fail to back up with data?" Then, find the data that either proves or debunks this assertion.
Technical SEO
Technical SEO entails making your site easy for search engines to crawl and index. This includes making sure each page has only one h1 (the HTML tag for a page's heading) and that your h1 includes your keywords. It also includes factors like page load speed, internal linking, site security and mobile friendliness.
If you're not familiar with the ins and outs of technical SEO, it can seem a bit overwhelming. Fortunately, if you've built your site on a platform like Squarespace, Wix or Wordpress, a lot of your technical SEO will already be done for you. However, it's still worth talking to an expert to ensure your site is optimized for search engine crawling and indexation.
Local SEO
If you're a
local business, your SEO strategy will be slightly different. First, you'll want to make sure your business is registered with Google My Business. This is a free service provided by Google. You'll fill in details like your physical address, phone number, business name and opening hours. Make sure these details are consistent with the ones you list on your website.
You can also include photos in your
Google My Business listing. The more photos you have, the better. This gives potential customers a feel for your business. The photos can showcase your stock, your premises and even events you hold for your business.
Another great tool at your disposal is Google My Business Posts. This allows you to share posts on your Google My Business listing that stay active for seven days. It's a great way to draw attention to special promotions or events.
You'll also want to make sure your business is listed in all relevant local directories. This can include sites like yellowpages.com, your local chamber of commerce, Yelp, the Better Business Bureau and CitySearch. Again, you'll want to make sure your contact information is consistent across all these sites.
Local SEO is a powerful tool for local businesses. Local search tends to be search with high intent. People searching local businesses are generally ready to buy. Making sure you're visible in local search is crucial.
Earned media
Everything we've discussed so far is what's known as owned media. They're the media sources you control, such as your own website and your social media presence. To promote your business, you should also look at earned media, or coverage from outside the channels you own.
Guest posting
Guest posting can be a great way to raise the profile of your business. This goes hand-in-hand with link building. When you find other blogs in your industry (that aren't directly competing with you), try to build a relationship with the webmaster. Offer them the opportunity to guest post on your site, and seek out the opportunity to write guest posts for them.
Guest posting helps cement your status as an authority in your field. It expands your visibility beyond your own website and social media channels, and puts you in front of a different audience. Best of all, you'll likely get backlinks to your own site.
Writing a press release
You'll also want to build up your presence in the media. Again, this helps position you as an industry expert. If you're producing original research, as we discussed earlier, you can use this original research in a press release.
Here's a tip for catching the attention of journalists: look through the calendar for holidays and awareness days, and think of original research you could produce that relates these days to your industry.
You can also use press releases to update journalists — especially industry trade journalists — on developments in your business.
Pitching to journalists
Journalists are busy people, and they're actively looking for stories to cover and sources to quote. Making yourself available as an expert source is providing a service to them.
If you're a local business, reach out to your local newspaper to update them on business developments, promotions and events.
If you're an online business, position yourself as an expert ready and willing to comment on industry trends. You can do this by signing up for
HARO, or Help A Reporter Out. The platform allows you to find journalists looking for sources on stories, and then pitch yourself as an expert commentator. Paid subscription models allow you to filter journalist queries by certain keywords relevant to your industry, and you can craft a profile to include with your pitches.
Virality
Venture capitalist Fred Wilson once colorfully stated, "Marketing is for companies that have sucky products." While we wouldn't go quite that far, we agree that having a great product does a lot of your marketing for you.
The quality of your product can lead to viral growth, which means you can scale back some of your marketing efforts. A great example of this is DropBox. DropBox did almost no marketing in its initial stages, instead relying on a great product to inspire word-of-mouth recommendations and viral growth. And it worked.
If you do have a great product and you can get it in the hands of a few key influencers, you might be able to leverage off this viral growth. Just remember that companies like DropBox are edge cases. Even companies with fantastic products have poured resources into marketing. For most companies, viral growth will supplement traditional marketing tactics, not replace them.
Viral marketing for innovative technology solutions
Business solutions involving an innovative product require a unique marketing strategy.
Product demand is never consistent, its adoption rises steadily during the early phases, peaks at a certain point and then begins to drop off as new technologies replace it.
Geoffrey Moore updated the technology adoption life cycle to include a “chasm” between early market adopters and the majority marketplace.
Figure 2 - Innovative solution lifecycle - Source: learn.marsdd.com
What does this mean for you?
A surge in popularity amongst early market adopters (tech enthusiasts and visionaries) does not guarantee that your innovation will rapidly progress through to the peak of its lifecycle. There’s still a sizeable chasm to overcome before the pragmatics are convinced.
Ramping up your marketing efforts could give you the sufficient momentum to cross this chasm.
You could incorporate the reviews from early marketers into your sales campaigns in order to convince the pragmatists to take a risk and consider trying your solution.
This is why it's important to keep track of your product’s position in its lifecycle.
The secret to initiating traction for your new product is to actively offer it to technology enthusiasts and visionaries first.
Since they are the first adopters of innovative solutions, it should not take much convincing for them to try your product, especially if it's free!
The benefit of having technology enthusiasts and visionaries as your initial adopters is that they will naturally become your evangelists and market your innovation for you.
Technology enthusiasts are not difficult to find. A quick search on social media will reveal an entire list of them in seconds.
Finding early market adopters for innovative solutions
Finding tech enthusiasts on youtube.
Step 1:
Search for a term related to your innovation followed by “review”
To keep things broad we searched for the term “tech review” in our example.
Step 2:
Filter the results by channels.
Figure 3 - Youtube search filters
This will populate a list of channels belonging to tech reviewers.
Figure 4 - Tech reviewers on Youtube
Step 3:
After you have created a list of influences you would like to offer your innovative solution to, reach out to each of them via email.
To reach out to influencers on YouTube, click on the “about” page on their YouTube channel. They'll usually have their contact details displayed.
Figure 5 - Contacting tech reviewers
In your email, offer your solution for them to review. Just keep in mind that their public reviews will be unbiased, so if they don't like something they will certainly mention it to all of their followers.
But don't let the fear of that prevent you from reaching out to them. Regardless of their review you never know who might watch their video and accelerate the success of your innovation.
Finding tech enthusiasts on Instagram.
FInding tech enthusiasts on Instagram is a very similar process.
Simply search the appropriate hashtag (in our example #techreview) and contact each of the instagram pages that populate in the result list.
Figure 6 - Tech reviewers on Instagram
To contact an Instagram page manager, you can either send them an email directly via their profile page, or use the email listed on their profile for business enquiries (sometimes they include a link to their website, which should contain a contact form).
Strategic Partnerships
Developing strategic partnerships is a very effective method of marketing your solution.
The benefit of strategic partnerships is that you're forming an alliance with organizations that already have a large audience they could market your solution to.
Strategic partnerships also give your venture credibility. If other organisations with more established reputations are willing to partner with you, it’s a very good sign that your proposition is highly trustworthy.
What does a business partnership look like?
It depends on your business solution.
If you're running a software company you could combine your software solution alongside others and offer a discount for the bundle.
In order for such a business partnership work, you would need to partner with businesses that offer a similar solution to yours but isn't a competitor.
If your business solution involves physical products you could form partnerships with specific suppliers and distributors and then demonstrate the resulting cost saving from such strategic partnerships in your business plan - prospective investors will love it.
There are several options for finding strategic partners:
LinkedIn
The benefit to using LinkedIn is that you will be able to directly contact the appropriate decision maker rather than having to plead your case to a receptionist first.
A great tutorial on laser targeted Linkedin search tactics,
click here.Google
Google is a great place to start to give you an idea of all the prospective partners.
Once you have an idea of who would like to contact you can then transition onto LinkedIn.
Meetup
Meetups are a great way of gathering with like minded individuals that are striving towards the same goal.
There are meetups for almost anything, so you shouldn’t have any issues finding the right group to mingle with in order to form strategic partnerships.
Measuring the ROI of inbound marketing
Measuring the return on investment of your inbound marketing strategy can be tricky. Inbound marketing doesn't always generate the same immediate, measurable return of many outbound marketing channels. In fact, inbound marketing can be a bit of a long game. In his book Content Inc., marketing expert Joe Pulizzi found it took around 15–17 months of consistent content creation to reach monetization.
So how do you measure a strategy that seems so abstract? Fortunately, there are plenty of metrics you can look to, including good old conversions and revenue.
First, you need to determine your investment in inbound marketing. The strength of inbound marketing is that it takes very little monetary investment. What you're actually investing is your time. Of course, your time is valuable, so you'll want to attach a monetary value to it accordingly.
If you lack the time or writing skill to produce blog posts, social media posts and press releases, you could consider hiring a freelance writer to do the hard work for you. If you go this route, you'll factor this cost into your investment in inbound marketing.
Next, you'll want to set specific, measurable goals for your inbound marketing strategy. What sort of traffic do you want your site to see as a result of your efforts? What kind of conversion rate are you aiming for? How many new customers do you want to gain from inbound marketing?
There are plenty of steps you can take to boost your conversion rate and help move site visitors down the funnel to convert them into paying customers, and this is where inbound marketing works in tandem with outbound marketing. We'll discuss some of these strategies later. But let's assume a somewhat conservative conversion rate of 3%.
So, if you decide you want to see 150 new customers per month as a result of your inbound marketing strategy, that means you'd need 5,000 visitors per month brought to your site through owned and earned media.
You can track your progress through Google Analytics. If you've set up your website through Squarespace, Wix or Wordpress, it should be easy to set up Google Analytics tracking. Here's the process for
Wix and the one for
Squarespace. For Wordpress, you can install a free plugin from
ExactMetrics.
If your site doesn't use one of these platforms, installing Google Analytics tracking can be a bit more complicated, so you might want to get a freelance web developer to do it.
Once you have Analytics installed, you'll want to pay attention to your site's traffic, the traffic to individual pages and the conversion rate from those pages.
Optinmonster has a great article on how to set up your Google Analytics account to track conversions.
You'll also need to set up your account to track your conversions and traffic from social media. You can do this by clicking on Acquisition in the left navigation bar, then choosing All Traffic, Channels and then Social.
So once you've determined the cost of your inbound marketing strategy, and you've determined the number of new customers you want to see as a return on that investment, you have an idea of the traffic you need to generate and the conversions you'll need as a result of that traffic. Now that you have your Google Analytics tracking in place, you can measure your results against those goals.
Don't get frustrated if it takes time to see the results you're looking for. As we mentioned, inbound marketing is a long game. It takes time and consistency to begin ranking on Google and start seeing significant traffic. But the good news is, those results accelerate over time. And the content you create as part of your inbound marketing has a long shelf life. It will continue to generate returns for years after you create it.
Pros of inbound marketing
A fraction of the cost of paid marketing
Offers your customers valuable content
Cons of inbound marketing
Takes longer to reach monetization
Outbound marketing
Outbound marketing is often called interruption marketing, and for a very good reason. This style of marketing takes your message out to customers and tries to grab their attention wherever they are.
Outbound marketing is an age-old technique, but technology has opened new channels for outbound marketing that can bring immediate, measurable results and help you target your audience with laser precision.
Offline advertising
With modern online advertising platforms, offline advertising can seem a bit antiquated. But as online ad channels become more popular, offline advertising is becoming less expensive. And it can still be a great way to get your brand in front of a large audience.
Some of the offline marketing channels you might consider include:
Outdoor display advertising
Branded promotional items (swag)
Trade show exhibitor space
While these channels can make it hard to target a specific audience, with a bit of research you can at least narrow your audience down. For television, radio or print advertising, make sure you get audience demographics. For channels like television and radio, audience demographics could change based upon the time of day your ad runs.
For outdoor display advertising, put thought into the geographic area where your ad will be located. What are the demographics of the area? What sort of people pass through the area on a day-to-day basis? Where are passing commuters coming from and heading to? All these insights can help you pick areas best suited to your target audience.
Measuring the ROI of offline advertising may seem difficult, but it doesn't have to be. Simply include unique landing page URLs in your ads for each offline channel and then track visits and conversions to those landing pages.
Pay-per-click
Pay-per-click marketing is, as it sounds, online advertising that charges you per clickthrough. The way the amount you pay per click is determined will depend on the platform, but most come down to a strategy of bidding for keywords.
Search Engine Marketing
Search engine marketing (SEM) is paid marketing through ads that appear at the top of search results pages. For our purposes, we'll focus on Google Ads.
To set up a Google Ads campaign, you'll first want to do some keyword research. Try to understand what people in the market for products or services like yours are searching. Look for searches where competitors' ads are showing up.
You can use some of the keyword tools we mentioned earlier, and you can also use Google Ads' own Keyword Planner tool. Keyword Planner will give you search volume data for each keyword, as well as the average bid for advertisers looking to display ads for that keyword.
Once you have a large list of keywords, it's time to go back through and refine your list. If you're already ranking organically for certain keywords, you'll want to consider whether it's worth paying to appear in the same search results.
You should also include your brand keywords. These are any keywords that include your brand name or a variation of your brand name.
You'll also want to remove keywords that don't have high buying intent. The more specific the keywords, the higher the intent is likely to be, and the lower the average bid. This doesn't mean you should automatically exclude more general keyword terms. Sifting out terms with low buying intent is more about spotting the keywords people are likely to be searching when they're still in the research phase of their buying journey, and aren't ready to purchase yet.
Once you've identified the keywords with low intent or the wrong intent, don't just discard them. You'll want to include them in your campaign as negative keywords. This specifically stops you from appearing in searches using these keywords. Remember, you're paying for every click. You don't want to appear in searches and get clicks that aren't going to convert into sales.
Once you have your keywords, you'll need to decide the maximum amount you can bid. As we mentioned before, Google Ads will tell you the average bid for a keyword, but to determine your maximum cost per click (CPC), you'll use this formula, as per
marketing guru Neil Patel.
Profit per customer x (1 - Profit margin) x Conversion rate = maximum CPC
Don't worry if that seems confusing. Let's plug in the numbers, and you'll get a more concrete idea of how the formula works.
So let's assume you're selling a $750. You're getting a $150 profit per customer for a 20% profit margin at a conversion rate of 3%.
$150 x (1 - 0.20) x 0.03 = $3.60
So, using this example, the maximum CPC you're shooting for is $3.60. You can actually set your maximum CPC slightly higher in Google Ads, as some keywords you might pay above your max CPC and some you'll likely pay below. But you'd want an average of $3.60 in order for your campaign to remain profitable.
So, if you have your maximum CPC set at $3.60, does that mean you'll actually be paying $3.60 for every click your ad receives? It doesn't.
This is where things can get a bit confusing. The amount Google Ads actually charges you is based on something known as Ad Rank. Your Ad Rank is your maximum bid multiplied by a metric known as Ad Quality Score. Your Ad Quality Score is a number out of 10 that Google determines based on your ad's click-through rate, the landing page it directs people to and its relevance for a keyword query.
So, let's assume you've done a great job writing your ad and your landing page, and your Ad Quality Score is 10 out of 10. With a maximum CPC of $3.60, your Ad Rank would be 36.
Your actual CPC is determined by both your quality score, and the next highest Ad Rank below you. The formula is:
Ad Rank of next highest advertiser / Your Ad Quality Score + $0.01 = Your CPC