Are You Bidding Correctly On AdWords? A Close Look At The Four Bid Options

AdWords offers four different types of bidding options. Each bidding option has different characteristics, uses, advantages, and disadvantages. It is important to understand which option you should be using so you are maximizing your time and getting the best ROI from your AdWords campaign.

These options are set at the campaign level. Therefore, your account could be using and testing different methods to find the best combination of bidding options for your business to be successful.

The four option types are:

  • Set maximum limits
  • Preferred cost bidding
  • Budget optimizer
  • Pay-per-action

While the Set Maximum Limits and Budget Optimizer methods have been around for a while, Preferred Cost Bidding just rolled out of beta, so it’s not well known yet and is a great alternative to the standard bidding option. The other, Pay Per Action, is still in beta. However, I’ve heard very good things about the launch so far, so I would expect it to come out of beta sometime over the next few months, and we’ll explore that option as well.

Option 1: Set maximum limits

This is the default setting bidding option. With this option, you set the maximum you are willing to pay per click. You can set these maximum bid at the ad group or keyword level. However, you rarely pay your max CPC. Because of the ad rank formula, and the AdWords discounter, your actual CPC can vary widely per keyword or per day.

As a quick refresher, the Ad Rank formula (where your ad shows up in the search results) is:

Ad Rank = (quality score) x (max CPC)


The biggest advantage to default standard bidding is that it is compatible with all of the advanced features possible through AdWords. It is also the only option that is compatible with position preference and advanced ad scheduling. If you are bidding by position or changing bids by time of day, the default bidding option is your best choice.


The biggest disadvantage with default standard bidding is that your actual costs and actual CPCs can vary widely from day to day. You have little control over what you actually pay. If you know what every keyword is worth to you, it can be difficult to determine what max CPC you need to set to actually pay that amount. In addition, on any given day, you might actually pay that amount.

It can also be quite time consuming to determine what you need to bid to pay certain costs. This is the most time-demanding bidding option.

For instance, if you determine you are willing to pay $5 for the keyword “mortgage” you might have to bid $10 to actually pay $5 for that keyword. There is also the risk that you might end up paying $10 for that keyword. Therefore, the risk of overpaying compared to what you desire to pay is high.

Who should use this?

If you are using all of the advanced features, this is the only bidding methodology for you. If you are constantly tweaking your CPCs in trying to determine what is the best combination of bid price with other campaign settings, you will probably want to use this feature until you are confident in what a keyword is really worth, and then maybe move to the second bidding option.

Option 2: Preferred cost bidding

With Preferred Cost Bidding, the bid you set is the average CPC you are willing to pay per click. So instead of having to guess at setting your max CPC in order to pay a certain amount, Preferred Cost Bidding let’s you set a bid cost at what you are truly willing to pay per click. This will be reflected in the average CPC. Each actual CPC may vary a bit, but overall, your average CPC should be close to your bid price. When you use Preferred Cost Bidding, Google will automatically calculate the max CPC you should be bidding to actually pay that amount; however, they will not show it to you. They do all the heavy calculations for each auction so that your ad shows in the position that is related to what you wish to pay per click.


If you know how much a click is really worth, then Preferred Cost Bidding takes the hard part of trying to determine the max CPC to actually pay that cost off of your hands. For those who know exactly what they want to pay per keyword or ad group, this bidding method will save you a lot of time.

The second reason to use this bidding method is if you want more consistent CPCs. When setting max bids, your actual paid CPCs can vary widely on any individual day. Preferred Cost Bidding will even out the paid cost per keyword so you should see a more even click cost on a daily basis.

The last reason is if you don’t want to constantly monitor and tweak CPCs. Since Preferred Cost Bidding automatically changes the max CPC so that you only pay an average CPC, there is less work in constantly tweaking bids.


The disadvantage to using Preferred Cost Bidding is that you don’t control your max CPC. You only control what you wish to pay. Therefore, the advanced AdWords features that are based off of changing max CPCs are not compatible with this bidding methodology.

At present, there are two features which are incompatible with Preferred Cost Bidding. The first is position preference. Position preference works by changing your max CPC so that your ad is shown within certain positions. If you have found your magical conversion spot by position, you will not want to use Preferred Cost Bidding.

The second feature that is incompatible with this bidding methodology is the advanced feature of Ad Scheduling. Ad Scheduling basic lets you turn your campaign on and off automatically by time of day or day of the week. This feature does work with Preferred Cost Bidding. The advanced version of Ad Scheduling allows you to automatically change your max CPC by time of day or day of the week. Advanced Ad Scheduling can be very useful if you’ve mapped out your sales cycle and are automatically changing bids based upon times of the week that have higher or lower conversion rates. However, since advanced Ad Scheduling works by changing the max CPCs, it is incompatible with Preferred Cost Bidding.

At present, any other new features that work by automatically changing your max CPC will be incompatible with Preferred Cost Bidding. Hopefully, Google will address these concerns. They could change advanced ad scheduling so that the bid changes are to your preferred CPC, and not to your max CPC. However, those are features that are on our wish list.

Who should use this?

If you know what your keyword are really worth this should be your preferred method. If you are frustrated with trying to constantly tweak the max CPC to actually pay a certain amount, this method might save you some time. This is quickly becoming one of my favorite bidding methodologies; however, there are quite a few campaigns I run that use the advanced Ad Scheduling features, so there are times when I can’t use it even though it would be my favorite choice.

Option 3: Budget optimizer

The Budget Optimizer allows you to input a monthly budget, and then it will change your keyword bids in order to maximize your traffic. When you go through the process of enabling the Budget Optimizer, you input a budget for a campaign, and then AdWords will give you a suggested max CPC and an estimate of how many clicks are possible. As it’s an automated system that is trying to spend your entire budget, and get the most clicks possible for that budget, you might see some odd numbers. It’s always worth tweaking the max CPC and total budget a few times to see what the suggested max clicks are before enabling the Budget Optimizer.

It’s worth noting that when you first enable the Budget Optimizer, you will see your keyword bids change dramatically. Some will be bid very low and others quite high. This is because it takes AdWords a week or two to determine how many clicks each keyword could receive and finding the optimal bids for those keywords. If you only use the system for a week, you won’t receive the full benefit of this bidding strategy. You have to let it run for a month to see how it performs for your account.


The Budget Optimizer is the easiest bidding methodology to use. You set a monthly budget and max CPC and it does all of the work. It’s the best bidding methodology if you just want to maximize traffic as that is its main purpose.


Since the Budget Optimizer takes over your keyword bidding, there is a serious downfall. If you consider some words to be more valuable than others, you won’t be able to bid those words higher than others as you lose complete control over bidding for that campaign. It can be worthwhile to put some keywords into a Budget Optimizer campaign and maximize traffic on those keywords, and then have other keywords in a Preferred Cost Bidding or Set Maximum Limits campaign where you can control the actual click cost for those keywords.

The other disadvantage is that Google needs complete control over the ad serving in order to maximize clicks. This makes the Budget Optimizer incompatible with some advanced features. The Budget Optimizer does not work with position preference, content bids, or ad scheduling. If you are using those features at present, then you will either lose control of that ad serving ability, or you will have to split keywords into multiple campaigns to see if the Budget Optimizer works for you.

Who should use this?

If your goal is to maximize traffic regardless of what keyword sent you the traffic, then the Budget Optimizer is your best bidding mythology. If you consider some keywords more or less valuable than others, then you will not want to use the Budget Optimizer.

Option 4: Pay-per-action

Pay Per Action bidding is still in beta. However, since we are going through all of the bid mythologies, it’s worth including. With Pay Per Action campaigns, you only pay when certain actions happen on your website. This could be a page view, a newsletter subscription, or an actual sale. However, if the action does not occur on your website, then you do not pay.

Pay Per Action ads are only available on the content network.

Essentially, you bid on actions, and publishers have the choice if they wish to run your offer. Also, since you are only charged when an action occurs, publishers are allowed to create ‘pre-sale’ pages to feature your offer, which is much different that the standard terms of service for AdSense publishers. Since you only pay per action, you must be using the AdWords conversion script so those actions can be recorded.


The biggest advantage is that you only pay when certain actions occur on your website. If the action does not occur, then you received the traffic from the ad, but do not pay for anything.


While the advantage to Pay Per Action campaigns is strong, there are also several disadvantages. The first is that you cannot control how many publishers are running your ads. Therefore, there is little control over volume. You can still set a maximum daily spend limit; however, if no publishers are carrying your ads, then you will not receive any conversions.

The burden falls on the advertiser to create high converting landing pages and have offers that publishers are willing to carry and promote.

The other disadvantage is that there’s not a way to contact publishers to give them better deals, see who is carrying your ad, entice them to carry your advertisement, and so forth. With most affiliate advertising, the advertiser can give publishers tips, special landing pages, and help publishers troubleshoot problems. At present, this communication does not exist.

Who should use this?

If you know what your conversion is worth, paying publishers for actions can be very profitable. As you only pay a set dollar amount per action, if you are making a profit on an action, you can set a very high daily budget limit without worrying about losing money. This is one of the most scalable solutions as you don’t have to worry about tweaking bids; you just have to make sure your site converts and that your offer is worth enough to a publisher for them to want to carry it on their website.


There are several different bidding options. Choosing the right one can make a difference in your success with AdWords. However, there is no rule that you can only use one of these options. Bidding options are set at the campaign level, so it’s possible to test a few of these options against each other within the same account to see which one works best for you.

Don’t forget that if you have keywords in different campaigns, you can lose ad serving control for that keyword.

Choosing the proper bidding methodology can save you time, money, and make you more profitable. It is worth evaluating your business goals, how you are using AdWords to reach those goals, and then find the bidding methodology that is aligned with achieving success.

Brad Geddes is the Director of Search for LocalLaunch, a blogger at, and a frequent conference speaker. The Paid Search column appears Tuesdays at Search Engine Land.

Opinions expressed in the article are those of the guest author and not necessarily Search Engine Land.

Related Topics: Channel: SEM | Google: AdWords | Paid Search Column | Search Ads: General


About The Author: is the Founder of Certified Knowledge, a company dedicated to PPC education & training; fficial Google AdWords Seminar Leader, and author of Advanced Google AdWords.

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  • Eric Holter

    Great information Brad, Thanks!

    I ran a quick test of the Pay-Per-Action option a couple weeks ago. I bid $5 for a completed action of an email newsletter sign up. I set my limit low to start–$20 per day. Within 20 minutes I got four subscribers. Unfortunately, all four email addresses were bogus.

    Has anyone else had problems like this with Pay-Per-Action? Any advice on structuring a sign up action that isn’t as easily scammed? Thanks!

    Eric Holter
    CEO – Newfangled Web Factory

  • Melissa

    Great overview, Brad. Very thorough and informative.



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