Betting on the Weak Horse

Posted on Monday, August 9th, 2010 by Print This Post Print This Post

Categories - SEM

In a videotape from late 2001, Osama bin Laden said: “When people see a strong horse and a weak horse, by nature they will like the strong horse.” But when it comes to managing sponsored search advertising campaigns, betting on the weak horse can sometimes bring a larger payout.

Many AdWords account managers spend, in my opinion, far too much time fiddling with bids. If an account has an overall cost-per-acquisition (CPA) target of $15 per conversion, a portfolio-like approach might suggest permitting one high-performing keyword to hit a $20 level while another is restricted only $10. Combined, their CPA might hit the overall target. To reach this noble goal, some people resort to what I have called the ‘Goldilocks Approach to Bid Management‘: if the CPA of an ad is above target, reduce the bid; if below target, raise the bid. It’s easy to show, though, that this approach might not be optimal.

Below are statistics from a keyword in an actual account that TSA manages. The keyword consists of two terms, the first of which is a verb describing intent to purchase (like ‘get’ or ‘buy’ or ‘find’) and the second a common generic noun (like ‘car’ or ‘shoes’ or ‘lamp’). The account bids on both the exact-match variant and the phrase-match variant of this word.

The tables below are based on actual performance data and on numbers provided by Google’s Bid Simulator (GBS), though the conversion rates have been rounded to help protect client data and some quantities estimated for demonstration purposes. In the month of June, the exact-match variant had an average position of 3.5 and the phrase-match variant an average position of 4.6.

Imagine that the spending rate in our account is such that we are going to finish the month with literally a few dollars left. We’d like to raise the bid on one keyword by just a penny to boost our spending that very small amount. We are currently bidding $0.78/click for the exact-match variant. It is getting about 5 times the traffic of the phrase-match variant, has a 3% conversion rate and is currently getting a CPA of $10.83. (The account-wide target CPA is $15.00, so this word is “CPA-positive”.) The phrase-match variant has a bid of $0.37/click, a conversion rate of 2.0% and is currently getting a CPA of $16.65 (meaning that variant is already above the account’s CPA target, so it is “CPA-negative”).

If we increase the bid of either of these variants by just one penny, the increase in ad cost will be enough to spend those extra couple of dollars we are looking to invest. The question is: which variant should get the bid increase?

By almost all measures, the exact-match variant is the Strong Horse. It has more traffic, a higher position, a higher conversion rate, a higher CTR, a lower CPC, is getting a lower CPA and is CPA-positive. (The only place where the exact-match is not the winner is that both variants have a Quality Score of 7. So, there it is a tie.) Increasing the bid for the exact-match variant from $0.78 to $0.79 per click will increase our cost by a few dollars, but also bring in conversions. If we take the ratio of the change in Cost to the change in conversions, we find that the marginal CPA (that is, the cost of an additional conversion) is $32.07.

The phrase-match variant has less traffic, a lower position, a lower conversion rate, a higher CPC, is getting a higher CPA and is CPA-negative. But increasing the bid for this variant brings in additional conversions at a marginal CPA of only $26.09. Even if you’re not the gambling type, betting on the Weak Horse is the clear winner. (One problem with relying on the Google Bid Simulator’s estimates to do this calculation in practice is that they are usually not finely grained enough to be able to calculate the marginal CPA directly, without doing some additional calculations first.)

The lesson is: When making bid changes, the traffic level, CPC, CTR, CPA, Quality Score, average position and conversion rate by themselves tell you nothing of any importance. If you have one additional dollar to spend, spend it on the word with the lowest marginal CPA – that is, the word that will get you the most conversions per dollar. That, inshallah, is the swiftest way to win the race.

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