PPC Bid Management Strategies

Engaging in a pay-per-click ad campaign with the major search engines can be confusing–and costly. Is it worth it to bid for the top spot? How much can you afford to spend, realistically? Richard Ball walks you through the cost-per-click equation and warns about the potential pitfalls.

Identify Max CPC

PPC (pay per click) bid management begins with identifying the maximum CPC (cost per click) you’re willing to pay for a given keyword phrase. If you do not know this value, it is not advisable to engage in PPC advertising. The max CPC will change over time and could vary from search engine to search engine. If you don’t know this value, start with an educated guess. This could be based on an industry rule of thumb or on internal factors such as profit margins. For example, let’s suppose you’re bidding on the keyword phrase “nike shoes” but do not know your max CPC. One way to estimate a max CPC involves taking the top 5 bids on Overture and computing the average. The current bids are: $0.51, $0.50, $0.33, $0.32, $0.31. The average is 39 cents. Use that as your max CPC to begin with.

A better approach is to base the CPC on your profit margins. Let’s suppose your average sale price on a pair of Nike shoes is $80 and your profit margin is 20%. That leaves $16 of profit for each shoe. Also, assume that your conversion rate will be 1% (this is a conservative estimate). For every 100 visitors from a PPC ad, you expect 1 sale. If you have $16 of ad to spread over 100 visitors, you have 16 cents to spend per click. Another way to approach this problem is to have an ad spend based on revenue. For example, if your goal is to spend 15% of revenue on advertising then your ad spend would work out to $12 per shoe. Again, assuming a conservative 1% conversion rate, that would leave you with 12 cents per click. As your campaign progresses and you determine your actual conversion rate, adjust the CPC accordingly.

{mospagebreak title=Different strategy for Google vs. Overture}

Adopt different bidding strategies for Google and Overture. Their PPC systems are quite different and it’s worth the effort to identify different bids across the two search engines for the same keyword phrase. Overture sponsored results are based solely on bid while Google uses a combination of bid and CTR (click through rate). Start with Overture to determine initial bid range, since their bidding system is open. It’s likely that advertisers bidding for keywords on Overture are also bidding on Google, and probably in the same range. For Google, use the Overture bids as your starting point in the short term and reduce the bids for the long term if your CTR is high enough.

Don’t bid for spot #1

Contrary to what the search engines recommend, it’s usually foolish to bid for the top spot. Why? Two reasons: 1) It is often prohibitively expensive, and 2) Most web surfers usually try a few different search queries until they’ve found the right one that fits what they’re actually looking for. A click from a surfer in the midst of refining a query usually doesn’t result in a conversion.

Tailor bids to actual search results

Track your paid traffic by keyword. Look to see which sites bring the bulk of your traffic and build your bidding strategy accordingly. Google ads will likely come primarily from www.google.com and aolsearch.aol.com, while Overture ads will likely drive traffic from search.yahoo.com and search.msn.com. Run search queries for your keyword phrase on the search engines that send the bulk of your results and see where your paid ad ranks. Note how many ads are on each page and whether they’re full ads or brief ads. Know where you want your ad to show up in the search results. Do you want your ad to be above the fold on the first page or is anywhere on the first three pages of results sufficient? Your max CPC will limit your choices.

{mospagebreak title=Take advantage of bid gaps}

Normally, bids are separated by a penny or two. Bid gaps occur when there’s a significant price increase to move up one spot in the PPC rankings. Looking at the top bids for “nike shoes” on Overture’s system:

1) 0.51

2) 0.50

      <– Bid Gap

3) 0.33

4) 0.32

5) 0.31

      <– Bid Gap

6) 0.16

7) 0.16

      <– Bid Gap

8) 0.11

9) 0.11

10) 0.10

11) 0.10

Is it worth almost twice the price to move from spot #6 to spot #5? Now that Yahoo is showing more ads per page and fewer search results, it is probably not worth it. Big advertisers blindly set a CPC across a large group of keywords, causing these bid gaps. Take advantage and fill a bid gap. For example, if your initial max CPC for this phrase was 32 cents, maybe it’s worth only bidding 17 cents.

{mospagebreak title=Overture PPC bid management strategy example}

Looking at a search for “nike shoes” on search.yahoo.com, note that there are 3 full ads across the top and 2 at the bottom. Down the right hand side are 8 brief ads. Look carefully and notice that spots #1-3 are at the top, #4-5 at the bottom and #4-11 down the right side. If you can afford the 34 cents to be in spot #3, do so. Being at the top of the page is very valuable. However, it’s likely not worth crossing the bid gap to be in spots #1 or #2. If you cannot afford spot #3, notice that being in spots #4 or #5 is twice the bang for your buck. These ads show at the bottom of the page in full form and at the top right of the page in brief form. This is very valuable real estate. This would cost 34 and 33 cents, respectively. Since there is no bid gap, pay for spot #4.

If that is still above your max CPC, note the remaining bid gaps. For 17 cents, you’d be in spot #6 and still above the fold, albeit in a brief ad on the right hand side of the page. Spot #8 can be had for 12 cents, spot #10 for 11 cents and bidding the current minimum, 10 cents, earns spot #15. Clearly, bidding 2 cents above the minimum achieves a ranking jump, from spot #15 to spot #8. It is rarely worth bidding the minimum. At the top end of the bidding range, you’ll find bid gaps. At the bottom end, you’ll find minor increases in bids often result in major ranking jumps.

{mospagebreak title=Google PPC bid management strategy thoughts}

Whether you’re bidding solely on Google or also on Overture, use the Overture bids for your keyword phrases as the “market value” for the bids. This market value could be the top bid itself or an average of the top N bids where you choose N. Choosing N in the range 3-8 is useful. If you can afford the market value you derive, use it. Otherwise, use your max CPC. That max CPC could be set for an entire ad group or for a specific keyword phrase. Track the ad carefully for a few days. Assuming the bid is high enough and generates sufficient traffic, you should have a good idea of the CTR within a few days. If the CTR is good (at least 2%), lower the CPC and see where your ad falls in the search results. If the CTR is sufficient, lowering the CPC should not result in your ad dropping many positions.

Run a query you’ve seen in the Web server logs and note the position of your ad. Drop the CPC by 10%, wait a few minutes, and run the search query again. Repeat until you remain in the top P positions where P is your goal, perhaps in the 3-5 range. Recognize that keyword bidding is a fluid situation and that Google updates that usually take seconds can sometimes take minutes. Be patient. Some would argue that continually running the same query will penalize you as your CTR will be lowered due to more views but no clicks. For queries with reasonable volume, a handful of searches is inconsequential. Plus, unless you’re clicking on your competitors’ ads, the denominator in the CTR calculation is increasing across all ads. If your ad’s CTR is very good (better than 7%) you will likely be able to drop your CPC in half without a noticeable drop in ranking.

If your ad group has many keyword phrases and there’s a divergence in CTR, consider creating multiple ad groups. The more tightly focused your ad group is, the lower your CPC will ultimately become as you weed out poorly performing keyword phrases. Adding negative keywords to each Google ad group will also help increase the CTR and thereby allow you to reduce your CPC. More information about negative keywords can be found here  (http://www.apogee-web-consulting.com/articles_adwords_negative.html)


Before embarking on a PPC advertising campaign, determine the maximum CPC you’re willing to pay for a given keyword phrase. Recognize that this value will change over time depending on your ad conversion rate, profit margins, advertising budget and other factors. Adopt different bidding strategies for Google and Overture. On either search engine, don’t waste money bidding for the top spot. Examine the paid traffic coming to your site and tailor your bids to the search engines bringing the bulk of the traffic. In doing so, take advantage of bid gaps to save money.

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