On the face of it, bid management is a simple process. Lower your bids where you are spending too much for a conversion. Raise your bids where you are willing to pay more for a conversion.
However, there are two hidden assumptions in the above “simple process” that can cause your bid management to be severely under optimized: Assuming all conversions are to be valued equally, and assuming you know where to edit the bids.
Tracking conversion value as expected customer value
For many AdWords advertisers, simply tracking conversions is an “advanced” tactic. High-performing marketers go a step further and also use AdWords conversion tracker to dynamically track the value associated with each conversion. With a simple modification to the conversion tracking script (and a tiny bit of custom programming), you can track the monetary value associated with each conversion. If one conversion brings in $30 while another brings in $50, both values will be recorded with their respective keyword in the AdWords reports (Google doesn’t currently allow you to see conversion value in the normal interface. The “total value” and “value / cost” stats are only available through reports in your AdWords Report Center.).
If every sale you make is a one-time sale at an identical price point, then it doesn’t provide much benefit to track conversion value. If this is the case though, you should be concentrating your efforts on increasing lifetime customer value by selling additional items to your customers.
For most businesses, however, the first sale is only a small percentage of the lifetime value of each customer. Do you know the average lifetime value of a typical customer? If not, scramble to get this value by querying your shopping cart and ecommerce data. You’ll need it if you want to take your bid management a step further.
If your initial sale is $50, but through additional sales over the course of the next 6-8 months, you average another $30 from each customer, your average lifetime customer value would be $80. Here’s where the advanced part comes in: Is every customer worth $80 to you? Or are there some customers who are worth $120, while others are only worth $50?
All customers are not created equal. The key is that you are not blind to which kind of customer you’ve just acquired. If you offer more than one product choice, your customers are segmenting themselves based upon their purchase. If you only have one product for sale, add an upsell opportunity immediately after the purchase. In addition to bringing in more initial revenue, it will also serve as a predictor of lifetime customer value.
Once you get some data under your belt, you should compute the average lifetime value for each of your customer segments. These segments may be based on the products purchased and/or upsells declined or accepted.
Next, edit your AdWords conversion tracker script to dynamically pass in the average lifetime value for the segment to which this customer now belongs. When using conversion value in this manner, your conversion tracker “value” stat becomes the estimated lifetime value for this particular customer instead of simply the value you received for that particular sale.
You’ll likely discover that some campaigns and ad groups tend to deliver higher value customers than others. Perhaps a $5 upsell actually signifies a $50 increase in average lifetime value. Having this data available within AdWords will give you new perspective into making decisions about how to better spend your money to acquire the most profitable customers.
When performing bid management based upon value instead of cost per acquisition (CPA), the stat that should now guide your bid decisions is “value / cost.” This figure, available through your AdWords reports and expressed as a percentage, represents the value you are getting (or expect to get) for every dollar you’ve spent in AdWords. So if you passed in $100 as your conversion value and you paid $50 for this sale, your value / cost would be 200% (100 divided by 50, expressed as a percentage).
After taking into account your cash flow, margin, and profit goals, decide on a value / cost you wish to target and start managing your bids accordingly—but first make sure you know where to be managing your bids.
Ad group bid management
It is likely that a large majority of your keywords are responsible for fewer than 2-3 conversions in a given month. So if you are managing bids at the keyword level, you only have enough data to make a bid decision about a small minority of keywords.
What becomes of your lower volume keywords? Typically, bids for these keywords are either perpetually ignored during cycles of bid management or a bid decision is made on the basis of only one or two conversions. This is hardly a statistically relevant sample size. Yet there is an alternative: manage bids at the ad group level so all your low-volume keywords take the default bid of the ad group.
In this manner, keywords with low traffic are managed on this portfolio level in aggregate. So while you may not have enough data on each particular keyword, when you consider the data from 20 or 30 keywords together you are much more likely to have solid ground for your bid changes.
There are tremendous advantages to this method of bid management. Your account will not only be optimized for your top performing keywords, but you will also be squeezing as much value as you can from your lower volume keywords.
Of course, this all assumes you have your ad groups structured properly. If your ad groups are made up of a bunch of keywords which target drastically different mindsets, you’ll have a very weak basis for aggregately managing bids at the ad group level.
If, however, you have a proper AdWords account structure where your ad groups are made up of semantically related keywords with the same stem keyword, you can take advantage of this statistically advanced bidding strategy—simply start managing your bids at the ad group level. AdWords allows you to give an ad group default bid which applies to all keywords in the ad group for which you haven’t specified a custom override bid.
The problem with managing bids at the ad group level, though, is that as soon as you give a custom bid to an individual keyword, you can no longer rely on the aggregate ad group statistics when making your bid management decisions. Why? Some high-traffic keywords in the ad group with custom bids would make your aggregate ad group CPA stats misleading. A custom bid could be manipulating the ad group CPA and you could mistakenly think an ad group bid needs to be changed when in fact the keywords with the default bid are doing just fine.
As such, when using the portfolio ad group bid management strategy, it becomes crucial that you only manage bids at the ad group level. This doesn’t mean you ignore opportunities at the keyword level. It simply means that if an individual keyword in an ad group begins performing differently than the rest of the ad group in terms of CPA or Value/Cost, you should pull that keyword into its own ad group where you can manage the bid more precisely.
Business success is achieved by continuously optimizing every stage of your marketing funnel. Tracking your customer value and managing bids in the most profitable manner will position your business for greatness.
Opinions expressed in the article are those of the guest author and not necessarily Search Engine Land.