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I'd say that a CTR of 1-2% is pretty good. But you're right that on its own, it's not enough to rely on when researching a market. All a click-through means is that your ad was interesting, and what you want to measure is how interesting your idea as explained on the landing page is. One thing I've heard recommended is to put a form on the front page ...

One approach for a starting point would be to see what Google could charge, then start negotiating. You might also ask him what he's paying elsewhere. Also, if you've got affiliate relationships set up with his competitors on your site, I would assume you have some conversion data you can use to do calculations, right? e.g. take the average conversion rate ...