In this last installment of my series on “Making Search Campaigns Work Harder in the Downturn” (part 1, part 2), I will cover essential bidding techniques and strategies, and what I call “insider” bidding secrets.
Let’s begin with keyword categorization. One way to categorize your keywords is to relate them to the number of conversions they can generate. You may categorize them into groupings called “head terms,” “fat-middle terms,” and “tail terms.” Head terms generate most of the traffic to your website, but generally need to operate above your CPA goal. Fat-middle terms often meet your CPA goal, and they can be bid on using a straight rules basis. Tail terms can generally come in under your CPA goal, but cannot produce the massive revenue generated by head terms. In order to have enough money to run your head terms over your CPA goal, you need to find places in your PPC campaign to run keywords below your CPA goals.
In general, you can keep the “tail” and “fat-middle” out of the top positions, since many times the ROI on those tops spots is tough to achieve. By shielding yourself from some of the irrational dynamics at the top position in the auction, you can then apply the money saved to head terms that require a higher bid. The graph below shows the categories of terms and how bidding some terms below your CPA goal and others above your CPA goal can help you achieve your overall CPA goal.
Marketers that reallocate spend in this manner generally increase impressions, clicks, and conversions at a lower overall cost than buying keywords in top spots. For those who like to understand the reallocation math, here is an example:
Assumptions for the example:
- CPA goal = $10
- Total conversions for March = 1,000
- Current Overall CPA for March = $9.20
- Average position of all keywords = 5
In order to create savings so you’ll have spend to reallocate, you do not increase bids on keywords above position 3.5, even if they are operating below your CPA goal. These keywords for the most part will be tail terms, usually either product-centric or geo-centric. To get an estimate of the savings created by this strategy, we will find the total number of conversions in the last month that occurred for keywords with average position above—or “north” of— position 3.5 (I’ll call these maxed keywords).
- Conversions occurring north of position 3.5 = 400 or 40% of total conversions
- CPA of keywords north of position 3.5: Northern CPA = $8
- Conversions occurring south of position 3.5 = 60%
- CPA of keywords south of position 3.5: Southern keywords = $10
To achieve the overall CPA goal of $10, southern keywords need a CPA target higher than the overall goal. The formula to calculate that goal follows:
Southern CPA Goal=((CPA Goal-Nothern CPA)*Northern Conv.)/(Southern Conv.)+CPA Goal
The formulae above estimates that southern keywords operating at the overall CPA goal of a $10 CPA need their bid boosted to $11.33 to allow the portfolio of keywords to reach an overall goal of $10.00. The formulae for calculating the required boost percentage follows:
Boost=(Southern CPA Goal)/((Northern CPA Goal))
Conclusion: Bidding 41% higher on the keywords south of position 3.5 allows you to hit your CPA goal of $10. Also, by allocating spend from the top of auction to positions further south, you can increase overall volume. Some advertisers act irrationally, overspending just to be in top position, or because they are not accurately measuring the performance of their paid search campaigns on a keyword basis. Since competition is heaviest at the top of the auction, moving a keyword from position 2 to position 1 can easily cost 5 times as much as moving a keyword from position 6 to position 3. This attribute of the auction landscape can be seen indirectly by examining the delta between your bid and CPC for keywords at different auction positions. This delta is called headroom (headroom = MaxCPC-AvgCPC). Headroom does not show the exact cost to move from one position to the next, but given the opaque auction environment, the measure indicates the competitiveness of different parts of the auction. In nearly all paid search auctions, positions further north have larger headroom.
The graph below shows the headroom in an auction by position. Circles indicate keywords, size of the circle indicates number of clicks.
In the graph above, the cost of moving from position 2 to position 1 can mean a massive CPC increase of $0.50 – $1.00. In this same auction environment, a marketer could usually spend just a $0.25 to move a keyword from 3 to position 2. Going from position 4 to position 3 is even cheaper. If the headroom between position 1 and 2 is that much larger than the headroom from position 2 and 3, most likely there are participants in the auction willing to lose money to take the top positions. As a savvy marketer, your best move might be to avoid that part of the auction. Be sure to automatically boost keywords selectively based on their average position from previous days.
Manually executing headroom calculations and spend reallocation strategies like the one above, as well as managing other vital mathematic functions over a large keyword set on a daily basis, is at best daunting and, at worst, impossible. The latest tools allow you to calculate the best bids on your tail terms, fat-middle terms, and head terms using a variety of algorithms. The best algorithms will at a minimum consider conversion rate, average order value, recency, volume and average position when calculating the best bid.
I hope these strategies I’ve provided help you generate the highest return out of your search dollars as we continue to weather these current economic conditions. Do you have a sure-fire search strategy you’d like to share? Please add it in the comment section below.
Opinions expressed in the article are those of the guest author and not necessarily Search Engine Land.