The Hidden Cost of Using Budget Limits

Posted on Monday, December 14th, 2009 by Print This Post Print This Post

Categories - Featured, SEM

The major search engines offer budgeting features to help advertisers keep their ad spending within a specified limit and to help spread it evenly over time.  But using these features can have a high hidden cost of which advertisers might not be aware.

Google, Yahoo and Bing permit advertisers to set monthly spending limits at both the account and campaign level, though neither make much sense for advertisers.  Having a campaign shut off due to a campaign-level budget limit is a classic case of throwing the baby out with the bath water: even in a campaign of only a dozen words, a few are likely to be bringing in profitable traffic when the budget limit is reached.  To shut off the entire campaign halts the profitable words as well as the unprofitable ones, when in fact the profitable words should have been permitted to continue running and the unprofitable ones should have had their bids reduced long before the budget limit was reached.

An account-level budget limit encounters the same problem, and some new ones as well.  Many account managers assume that the account-level budget limit acts like a light switch – when the daily spending limit is reached, the account is simply paused for the remainder of the day.  But a chapter by Sébastien Lahaie in Algorithmic Game Theory (Cambridge University Press, 2007) shows that it’s in a search engine’s better interest to instead gradually throttle spending down over the course of the day, like slowly shutting off a water faucet, by simply penalizing an advertiser’s Quality Score (or Quality Index, or equivalent) as the spending approaches the budget limit.

Those familiar with Google’s auctions know that an ad’s bid multiplied by its Quality Score (a quantity called the ‘AdRank’) determines the sorting of ads on a search engine results page (SERP), with the highest AdRank ad appearing at the top and subsequent lower AdRank ads in order down the page.  Thus, advertisers can move up in the rankings by raising their bid, or improving their Quality Score, or both.  Also, an ad’s Quality Score helps determine the cost-per-click (CPC), since dollars from high-QS advertisers are weighed more heavily than dollars from low-QS advertisers.  But fewer know how the Quality Score is used before the ad auction even occurs to determine whether or not the ad will be permitted to participate in the ad auction at all.

For each keyword, Google specifies a minimum AdRank below which they refuse to consider ads for placement.  Doing this maximizes their revenue.  (Google refers to this minimum obliquely in their AdWords help page on the ‘bid requirement‘, but since they know your Quality Score, a minimum required bid and minimum required AdRank are equivalent.) When the amount a given advertiser has spent to-date is small compared to their budget limit, their Quality Score should be penalized very little, but as the amount spent increases, the Quality Score should be penalized more and more until, when the limit is reached, the Quality Score becomes 0% of its normal value.  Graphically, the optimal relationship (for the search engine) looks something like:


In their AdWords help pages Google claims that setting a budget does not affect the position at which ads are shown.  How is it possible that a search engine could penalize an advertiser’s Quality Score more and more as budget is used up, but not have that advertiser’s average position drop as a result?  Simple: The search engine can use the penalized Quality Score to determine whether or not an ad is eligible to be shown (that is, they can see if the penalized AdRank is greater than the minimum permitted AdRank), but then use the non-penalized Quality Score within any individual ad auction to determine the position and CPC.

Many account managers have improved a keyword’s Quality Score, or increased its bid, to find that the number of impressions they get goes up.  Setting an account-level budget limit has the opposite effect: as the budget is used up in the course of the day, the penalized Quality Score decreases, making the advertiser’s ad eligible for fewer and fewer impressions (but for those auctions where the ad does appear, the ads get the same average position for the same average CPC).

The lessons for online marketers are simple:

  • Campaign-level budgets (and account-level budgets, for that matter) will tend to pause well-performing ads alongside poorly performing ones, so it’s in the advertiser’s best interest to not use them at all.
  • Setting an account-level budget will likely result in your ads’ pre-auction Quality Score (which is used to determine whether or not an ad is allowed to participate in a given auction) to be penalized and this penalty increases as the amount spent approaches the budget limit, reducing impressions.  (The in-auction Quality Score is likely unaffected.)
  • Account managers are typically best off setting ‘accelerated delivery’ only (rather than asking the search engine to spread impressions out over time) since doing otherwise gives the search engine additional control over whether and when your ads are shown.

Short story: It’s your account, and before using any of the ‘helpful’ features that the search engines offer, it’s wise to ask for whose benefit they are built.

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