When The Optimum Bid Doesn’t Exist
Posted by Steve Baker on Friday, May 22nd, 2009 in Google Adwords
The theory’s sound. You want to get as many sales as possible for your budget, so you adjust the bids in such a way as to ensure that it runs out just as the day ends (on average). Bidding any less will give you fewer clicks, as will bidding more (since you run out of budget), so assuming that your conversion rate doesn’t vary dramatically in different positions.
And that’s all fine and dandy, if there’s a bid that achieves this. But sometimes, it’s impossible to do this. I’ve found this to be most of an issue when the bulk of your traffic comes from a single keyword, and the optimal position is about 3rd – 4th.
The difference in the clickthrough rate between 3rd and 4th can be huge – in third position you are appearing above the natural search results, and in fourth position, you are pushed off into the top right corner. Clearly, your advert is going to be seen more often on the left.
Take an extreme example, an account comprising a single keyword on Exact Match. It has a budget of £100 per day, and gets the following results in the following positions…
|
Position |
Impressions |
CTR |
Clicks |
Cost Per Click |
Cost |
|
1 |
1,000 |
7.0% |
70 |
£5 |
£350 |
|
2 |
1,000 |
6.0% |
60 |
£4 |
£240 |
|
3 |
1,000 |
5.0% |
50 |
£3 |
£150 |
|
4 |
1,000 |
2.5% |
25 |
£2 |
£50 |
|
5 |
1,000 |
2.0% |
20 |
£1 |
£20 |
So what should you bid? Whether you bid £2.01 or £2.99 will make no difference – your advert will still be 4th, and you’ll only spend under half of your budget. Pushing the bid up from £2.99 to £3.00 will result in your budget running out part-way through the day.
So what should you do? Scheduling your advert to run only at certain times of the day certainly isn’t the optimal answer (unless you have conversion data indicating that this is the way to go).
Arbitrarily bidding £3 for part of the day and £2 for the rest makes no sense in terms of your sweet spot – if the conversion rate is the same in both positions, then there should be a single sweet-spot.
But this would give you more clicks for your budget. Suppose in the above example that you bid £3 for the first half of the impressions, then dropped it to £2. From the first 500 impressions, you’d get 25 clicks, at a cost of £75. From the second 500 impressions, you’d get 12.5 clicks, for £25. So you’d spend the full budget, and get 37.5 clicks – more than you could get any other way…
So that’s the answer then.
But wait a minute (I hear you cry)! Surely the profit from appearing in 3rd 50% of the time and 4th 50% of the time must be lower than the profit of the most profitable position (3rd or 4th)?
If you didn’t have a budget, then the above strategy could never be the most profitable one – either appearing 3rd all of the time or 4th all of the time would be more profitable.
Suppose for example that the conversion rate above was 5%, with conversions worth £100 each. The profitability of each position – if you had no budget restriction – would look like this:
|
Posn |
Impress. |
CTR |
Clicks |
CPC |
Cost |
Conv. Rate |
Conv |
CPA |
Profit |
|
1 |
1,000 |
7.00% |
70 |
£5 |
£350 |
5.0% |
3.50 |
£100 |
£0 |
|
2 |
1,000 |
6.00% |
60 |
£4 |
£240 |
5.0% |
3.00 |
£80 |
£60 |
|
3 |
1,000 |
5.00% |
50 |
£3 |
£150 |
5.0% |
2.50 |
£60 |
£100 |
|
4 |
1,000 |
2.50% |
25 |
£2 |
£50 |
5.0% |
1.25 |
£40 |
£75 |
|
5 |
1,000 |
2.00% |
20 |
£1 |
£20 |
5.0% |
1.00 |
£20 |
£80 |
So the most profitable position would be 3rd. Appearing 3rd 50% of the time and 4th 50% of the time would make you only £87.50, so you wouldn’t want to do it.
But if you have a restricted budget of £100, you can still make £87.50 by appearing in both positions – but appearing in 3rd all of the time would only make you £67 in profit before you ran out of money.
In general, if 3rd position is more profitable than 4th, but would run out of budget, you will make more profit by ensuring that you spend the full budget, just as the day ends.
In this case, appearing in 3rd half of the time and 4th half of the time will spend the full budget. Appearing 4th more of the time will spend less than the full budget, and appearing 3rd more of the time will run out of money. Since 3rd position would be more profitable that 4th given unlimited budget, you should appear in 3rd as often as possible, without running out of budget (in this case, 50% of the time).
In practice, this is quite a fiddly thing to do. You may be better to take advantage of varying traffic volumes on different days of the week. If you can spend £150 on a Monday, and only £50 on a Sunday, then run different campaigns on different days with different budgets. But if this doesn’t get you around this problem, then you may want to consider the above solution…
This is a theoretical situation, of course. If you have a number of keywords, or your keywords appear in different positions in different locations, or at different times of the day, then small adjustments to the bids will affect the amount that you spend. In the main part, this is just something to bear in mind if you find that your spend fluctuates wildly, with no obvious reason. Check the position on the keywords that generate the most traffic, and see if the position is the root cause of the problem.
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