What does Christmas mean to you? Carol singing? Eating too much? Morecambe and Wise repeats? GIving people nice presents, and getting socks in return? If your online business sells the sort of things people buy at Christmas, and you have a PPC campaign, it means high bids and high traffic volumes. There are a lot of people out there desperate to buy things, and a lot of retailers trying to cash in. So what should you be looking to do? Leave your bids alone, and slip down the rankings, but keep your profit per sale the same? Or increase your bids, and grab as many sales as you can, albeit with a smaller profit from each one? In short, what happens to your sweet spot if your competitors all increase their bids? And what happens if only one competitor does? I’ve put together three different situations, with different bids, conversion rates and profits per conversion. Then I looked at the correct strategy if
- All of the competitors increase their bids by 50%
- The competitor immediately below you increases his bid sharply, to move top.
The first thing to bear in mind is that the number of impressions has no bearing at all of the sweet-spot. If each position gets the same percentage of the clicks, then it makes no difference. In effect, if you double the number of impressions, you’ll double the number of clicks, the number of conversions, the cost and hence the profit, in every position. I’ve assumed that everyone has the same Quality Score here – it’s unlikely to make a major difference to the So, for the sake of simplicity, I’ve left the traffic volumes where they are. They’ll impact the total profit that you make, but not the most profitable strategy. Here’s the first scenario. Each conversion makes a profit of £100, the conversion rates are fairly healthy, and the cost per clicks are quite high.
| Bid | Position | Impressions | CTR | Clicks | CPC | Cost | Conv. Rate | Conversions | Cost Per Conv. | Profit |
|---|---|---|---|---|---|---|---|---|---|---|
| £5.00 | 1 | 100000 | 8.0% | 8000 | £4.01 | £32,080 | 4.0% | 320 | £100 | -£80 |
| £4.00 | 2 | 100000 | 7.0% | 7000 | £3.31 | £23,170 | 4.3% | 298 | £78 | £6,580 |
| £3.30 | 3 | 100000 | 6.0% | 6000 | £2.81 | £16,860 | 4.5% | 270 | £62 | £10,140 |
| £2.80 | 4 | 100000 | 5.5% | 5500 | £2.41 | £13,255 | 4.8% | 261 | £51 | £12,870 |
| £2.10 | 6 | 100000 | 4.5% | 4500 | £1.86 | £8,370 | 5.0% | 225 | £37 | £14,130 |
| £1.85 | 7 | 95000 | 4.0% | 3800 | £1.66 | £6,308 | 5.0% | 190 | £33 | £12,692 |
| £1.65 | 8 | 90000 | 3.5% | 3150 | £1.51 | £4,757 | 5.0% | 158 | £30 | £10,994 |
| £1.50 | 9 | 75000 | 3.0% | 2250 | £1.41 | £3,173 | 5.0% | 113 | £28 | £8,078 |
| £1.40 | 10 | 60000 | 2.5% | 1500 | £1.26 | £1,890 | 5.0% | 75 | £25 | £5,610 |
This is the data for a typical month. The most profitable position is 5th, with a cost per click of £2.11, though 6th position is only marginally less profitable. What happens if everybody increases their bids by 50% for Christmas?
| Bid | Position | Impressions | CTR | Clicks | CPC | Cost | Conv. Rate | Conversions | Cost Per Conv. | Profit |
|---|---|---|---|---|---|---|---|---|---|---|
| £7.50 | 1 | 100000 | 8.0% | 8000 | £6.01 | £48,080 | 4.0% | 320 | £150 | -£16,080 |
| £6.00 | 2 | 100000 | 7.0% | 7000 | £4.96 | £34,720 | 4.3% | 298 | £117 | -£4,970 |
| £4.95 | 3 | 100000 | 6.0% | 6000 | £4.21 | £25,260 | 4.5% | 270 | £94 | £1,740 |
| £4.20 | 4 | 100000 | 5.5% | 5500 | £3.61 | £19,855 | 4.8% | 261 | £76 | £6,270 |
| £3.60 | 5 | 100000 | 5.0% | 5000 | £3.16 | £15,800 | 5.0% | 250 | £63 | £9,200 |
| £2.78 | 7 | 95000 | 4.0% | 3800 | £2.49 | £9,443 | 5.0% | 190 | £50 | £9,557 |
| £2.48 | 8 | 90000 | 3.5% | 3150 | £2.26 | £7,119 | 5.0% | 158 | £45 | £8,631 |
| £2.25 | 9 | 75000 | 3.0% | 2250 | £2.11 | £4,748 | 5.0% | 113 | £42 | £6,503 |
| £2.10 | 10 | 60000 | 2.5% | 1500 | £1.89 | £2,835 | 5.0% | 75 | £38 | £4,665 |
Should you drop down the results page, or increase your bids? In this case, a bit of both. Your CPC has increased from £2.11 to £2.79, and you’ve dropped a position in the search results. Here, the higher cost of staying in 5th has more than outweighed the additional conversions that you’d get there, compared to 6th. On the other hand, leaving the CPC at £2.11 would have cut your conversions by more than half (compared to staying in 5th), which would cost you more in lost profits than it would save you in terms of cheaper clicks. Note that the profit appears to have fallen here, but that’s because I didn’t increase the traffic volumes. If the traffic doubled over Christmas, your profit in 6th position would be just under £20,000. One final note here – in this instance, if the bids increased by more than 15%, the correct position to appear in changes to 6th. To make it drop to seventh, the bids need to increase by a massive 70%. Interesting, but hardly conclusive. This is just one scenario, so let’s try another one. Here, the profit per conversion is lower – £60 – and the cost per clicks and conversion rates are also much lower:
| Bid | Position | Impressions | CTR | Clicks | CPC | Cost | Conv. Rate | Conversions | Cost Per Conv. | Profit |
|---|---|---|---|---|---|---|---|---|---|---|
| £0.50 | 1 | 100000 | 8.0% | 8000 | £0.41 | £3,280 | 1.2% | 96 | £34 | £2,480 |
| £0.40 | 2 | 100000 | 7.0% | 7000 | £0.36 | £2,520 | 1.3% | 91 | £28 | £2,940 |
| £0.35 | 3 | 100000 | 6.0% | 6000 | £0.31 | £1,860 | 1.4% | 84 | £22 | £3,180 |
| £0.26 | 5 | 100000 | 5.0% | 5000 | £0.23 | £1,150 | 1.5% | 75 | £15 | £3,350 |
| £0.22 | 6 | 100000 | 4.5% | 4500 | £0.20 | £900 | 1.5% | 68 | £13 | £3,150 |
| £0.19 | 7 | 95000 | 4.0% | 3800 | £0.17 | £646 | 1.5% | 57 | £11 | £2,774 |
| £0.16 | 8 | 90000 | 3.5% | 3150 | £0.15 | £473 | 1.5% | 47 | £10 | £2,363 |
| £0.14 | 9 | 75000 | 3.0% | 2250 | £0.13 | £293 | 1.5% | 34 | £9 | £1,733 |
| £0.12 | 10 | 60000 | 2.5% | 1500 | £0.11 | £162 | 1.5% | 23 | £7 | £1,188 |
Here’s the scenario for a typical month. The optimum position is 4th, though 2nd – 6th is very flat. So it seems plausible that the impact of a big increase in bids would be greater. Again, increasing the bids by 50% for Christmas…
| Bid | Position | Impressions | CTR | Clicks | CPC | Cost | Conv. Rate | Conversions | Cost Per Conv. | Profit |
|---|---|---|---|---|---|---|---|---|---|---|
| £0.75 | 1 | 100000 | 8.0% | 8000 | £0.61 | £4,880 | 1.2% | 96 | £51 | £880 |
| £0.60 | 2 | 100000 | 7.0% | 7000 | £0.54 | £3,745 | 1.3% | 91 | £41 | £1,715 |
| £0.53 | 3 | 100000 | 6.0% | 6000 | £0.46 | £2,760 | 1.4% | 84 | £33 | £2,280 |
| £0.45 | 4 | 100000 | 5.5% | 5500 | £0.40 | £2,200 | 1.5% | 83 | £27 | £2,750 |
| £0.33 | 6 | 100000 | 4.5% | 4500 | £0.30 | £1,328 | 1.5% | 68 | £20 | £2,723 |
| £0.29 | 7 | 95000 | 4.0% | 3800 | £0.25 | £950 | 1.5% | 57 | £17 | £2,470 |
| £0.24 | 8 | 90000 | 3.5% | 3150 | £0.22 | £693 | 1.5% | 47 | £15 | £2,142 |
| £0.21 | 9 | 75000 | 3.0% | 2250 | £0.19 | £428 | 1.5% | 34 | £13 | £1,598 |
| £0.18 | 10 | 60000 | 2.5% | 1500 | £0.16 | £243 | 1.5% | 23 | £11 | £1,107 |
The results are similar to the ones in the first scenario – you increase the bid, but not enough to retain 4th position in the results. To make 5th the optimum position here, the bids need to increase by a factor of 35% – 82%. Here’s one more scenario – in this case, the profit per conversion is low – £15, the conversion rates are very high and the bids are moderate.
| Bid | Position | Impressions | CTR | Clicks | CPC | Cost | Conv. Rate | Conversions | Cost Per Conv. | Profit |
|---|---|---|---|---|---|---|---|---|---|---|
| £1.00 | 1 | 100000 | 8.0% | 8000 | £0.81 | £6,480 | 10.0% | 800 | £8 | £5,520 |
| £0.80 | 2 | 100000 | 7.0% | 7000 | £0.61 | £4,270 | 11.0% | 770 | £6 | £7,280 |
| £0.60 | 3 | 100000 | 6.0% | 6000 | £0.51 | £3,060 | 12.0% | 720 | £4 | £7,740 |
| £0.40 | 5 | 100000 | 5.0% | 5000 | £0.31 | £1,550 | 13.0% | 650 | £2 | £8,200 |
| £0.30 | 6 | 100000 | 4.5% | 4500 | £0.26 | £1,170 | 13.0% | 585 | £2 | £7,605 |
| £0.25 | 7 | 95000 | 4.0% | 3800 | £0.21 | £798 | 13.0% | 494 | £2 | £6,612 |
| £0.20 | 8 | 90000 | 3.5% | 3150 | £0.16 | £504 | 13.0% | 410 | £1 | £5,639 |
| £0.15 | 9 | 75000 | 3.0% | 2250 | £0.13 | £293 | 13.0% | 293 | £1 | £4,095 |
| £0.12 | 10 | 60000 | 2.5% | 1500 | £0.11 | £162 | 13.0% | 195 | £1 | £2,763 |
Again, in this example, 4th is the optimum position (I’m not suggesting that this is always the case – it’s just convenient when comparing the results from different scenarios). Once more, here’s what you get when you increase the bids by 50%.
| Bid | Position | Impressions | CTR | Clicks | CPC | Cost | Conv. Rate | Conversions | Cost Per Conv. | Profit |
|---|---|---|---|---|---|---|---|---|---|---|
| £1.50 | 1 | 100000 | 8.0% | 8000 | £1.21 | £9,680 | 10.0% | 800 | £12 | £2,320 |
| £1.20 | 2 | 100000 | 7.0% | 7000 | £0.91 | £6,370 | 11.0% | 770 | £8 | £5,180 |
| £0.90 | 3 | 100000 | 6.0% | 6000 | £0.76 | £4,560 | 12.0% | 720 | £6 | £6,240 |
| £0.75 | 4 | 100000 | 5.5% | 5500 | £0.61 | £3,355 | 13.0% | 715 | £5 | £7,370 |
| £0.45 | 6 | 100000 | 4.5% | 4500 | £0.39 | £1,733 | 13.0% | 585 | £3 | £7,043 |
| £0.38 | 7 | 95000 | 4.0% | 3800 | £0.31 | £1,178 | 13.0% | 494 | £2 | £6,232 |
| £0.30 | 8 | 90000 | 3.5% | 3150 | £0.24 | £740 | 13.0% | 410 | £2 | £5,402 |
| £0.23 | 9 | 75000 | 3.0% | 2250 | £0.19 | £428 | 13.0% | 293 | £1 | £3,960 |
| £0.18 | 10 | 60000 | 2.5% | 1500 | £0.16 | £243 | 13.0% | 195 | £1 | £2,682 |
Once more, the conclusion is a kind of half-way house. You increase your bids, but not by enough to maintain 4th position. In this case, the range of bid increases for which the 5th spot is the optimum is 38% – 159%. So what are the conclusions here? In all of these cases, an increase in bids of 50% led to the sweet spot dropping by one position. But this isn’t the whole story – an increase in bids of 30% would have resulted in the sweet spots in the last two scenarios remaining in the same place. And an increase of 100% would have led to the first two sweet spots dropping by two places. So, to a certain extent at least, the impact on your optimum bid depends on your particular circumstances. However, there are two conclusions that are true in every scenario I could think of:
- You should never reduce your bids.
- You should never move further up the search results.
So your new bid is bounded by two values, the amount required to retain your old position, and your old bid. At what point between these two values you should set your bid depends on individual circumstances. One further point here – if you see the conversion rate increasing in the run up to Christmas, then there is clearly scope to increase your bids, and possibly your position within the search rankings, as the value of a click increases. Similarly, if your average order value increases, then your clicks become more valuable, in which case you may find your sweet-spot moving up. At the start of this blog, I asked two questions. All of the work so far has been based around a scenario where everyone increases their bids. But what happens if only one competitor does. If their increase doesn’t affect your position (they were above you before they increased their bid, or below you even after increasing their bid) then it makes no difference at all. Your sweet spot will not change at all, barring very unusual circumstances. If they move above you, then there are two possibilities – you can either increase your bids to retain your old position, or you can leave your bids alone, and drop one place in the search results. No other option makes any sense, if you think about it. Regrettably, there is no absolute answer to this one. However, in the vast majority of cases (including the three from earlier) the correct decision is to leave your bids where they are, and drop down one position in the search results. The company that has made this decision has made their campaign less profitable, as well as a number of other people’s campaigns. All of which leads to the conclusion hinted at in the title of this blog. Whenever competition on keywords rises, and people start a bidding war, Google makes more money from PPC. But then, Christmas is all about giving, and not receiving…
Which is all fine and dandy. But the other day, I was doing some forecasts and my profit curve looked like this: 
Clearly, I’d made a mistake! So I went back, and checked my forecasts for the clickthrough rate, the conversion rate and the cost per click. Here they are… 
I’ve changed the actual figures, but the result is the same. With a profit per conversion of £300, this gave me an inverted profit curve. Assuming that the cost per click is higher for higher positions, the conversion rate is lower or the same for higher positions, and the clickthrough rate is higher for higher positions, the profit from each conversion must be higher in lower positions. In my case, the conversion rate was clearly higher, the lower my advert appeared. If this effect outweighed the increased number of clicks that I got in a higher position, then it’s possible that I’d predicted that I’d get more conversions in a lower position than in a higher position. For example, if 5th place generated 5,000 clicks with a 3% conversion rate, and 6th position generated 4,000 clicks with a 4% conversion rate, then 5th place would generate 150 conversions, and 6th would generate 160 conversions. Clearly this is a danger when forecasting, particularly if you extrapolate beyond the range of your data. I can’t accept that you can get more conversions from a lower position in practise unless you have a restrictive budget (which I didn’t), so I looked at my data to see if this was the problem… 
So that’s not the problem. Finally, I looked at the profit per conversion, the number of conversions, and the product of the two (the total profit). 
The number of conversions is lower in lower positions, the profit from each is higher, and you get this ‘inverted’ profit curve – a ’sour spot’. So, the question is whether this is possible in reality, or if it’s just a flaw in the forecasting method. The answer is surprisingly simple once you think about it. If you advertise in a very low position (say, 100), you’ll get almost no conversions, and hence make almost no profit. The true shape of this curve would probably be something like this: 
It’s possible that multiplying these two monotonic functions (conversions and profit per conversion) can generate two turning points in your profit curve – a maximum and a minimum. I can accept that this is possible, and graphs of the above shape will have a sweet-spot of either 1st or the local maximum (in the above example, 6th). This raises one final question. In the above example, I looked at the top six positions, saw the sour-spot and understood that I needed to extrapolate further. But if I’d only run the advert in positions 3 to 8, I would have seen a sweet-spot, and thought no more about it. In this case, I’d still (just about) have the correct sweet-spot, but another time, I may have missed out on potential profit. And perhaps I have done. My conclusion is this – extrapolate your data as far as possible, limiting your graph only at your total budget. See if this kind of shape is a possibility, and investigate it.
This is a quick way of telling whether you are in your sweet spot, and whether the change that you just made was a good one or not… Since you can see on your campaign summary how much you spent, and how many clicks you got over a specified period, so you can certainly get a quick and easy answer to whether your latest change worked, without having to do lots of sums…
2 comments