Subtle science of_bidding_guide
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This document summarizes the complexities of bidding strategies in search engine marketing. It explains that the relationship between bid, cost-per-click (CPC), and position is more complicated than commonly understood, as the actual auction mechanism considers additional factors like click-through rate estimates. High bids do not always guarantee the top position and can sometimes lead to higher costs and lower returns. The document also cautions that changes to bids for one keyword can unintentionally impact performance of other keywords, so simultaneous management is important. Effective strategies require sophisticated modeling of these interrelationships.
Subtle science of_bidding_guide
- 1. The subtle science of bidding Guide The subtle science of bidding Understanding nuances of the SEM marketplace Contents Search keyword management and executing a bidding strategy can be complicated. Beyond the usual bid, cost 1: Bid, CPC, and per click (CPC), impression, and position considerations, several nuances in the search engine marketing (SEM) impressions: auction mechanism to consider when making bid decisions. This white paper explores the marketplace features The real story that Adobe leverages on behalf of its advertisers to generate maximum return for their advertising dollar. 1: What adwords tell you 2: The actual auction Before delving into the details, it’s instructive to understand how Google’s Ad Rank system truly works (versus mechanism how we are told it works). 3: Brand keyword management 5: Second order effects Bid, CPC, and impressions: The real story 6: About the Adobe Digital Marketing Suite Here is the daily data for an exact match brand keyword. The data is normalized to eliminate day-of-weeks effects. 7: About Adobe Systems Incorporated Bid CPC Average Position Clicks Impressions $23.38 $1.35 1.01 1,868 14,105 $17.80 $0.50 1.09 1,701 9,039 $9.42 $0.33 2.01 9,00 5,625 These numbers are surprising. Knowledge of the auction marketplace as well as information provided by Google’s AdWords helps, but even then, these numbers don’t make a lot of sense. Here is why this data is unexpected. • If a bid of $23.38 got an average position of 1.01 at a CPC of $1.35, why did a $9.42 bid get position 2.01? You would expect the $9.42 bid at position 1 because it’s so much higher than the CPC of the current position. • Why did impression volume drop when the bid changed from $23.38 to $17.80? Oddly enough, click volume did not change much. • Why did CPC increase so much from position 1.09 to 1.01? • Why the huge gap between the bid and CPC? Although Google data is being used to explain these observations, all search engines employ a similar strategy to determine CPC. What AdWords tell you The Google Help pages state that the CPC paid is a function of bid, quality score, and your competitors’ bid and quality score. Step 1 Google calculates the Ad Rank for all advertisers in the auction in which Ad Rank = Quality Score * Bid Step 2 Advertisers are in descending order of their Ad Rank. This determines rank in the auction process. Step 3 CPC is calculated as: CPC = (the next closest and lower Ad Rank to yours)/your quality score + $0.01
- 2. Here is a dataset to understand how the auction mechanics work. Advertiser Bid CTR QS Rank=QS*Bid Rank2=CTR*Bid A $25 15% 10 250 3.25 B $10 8% 7 70 0.8 C $10 2% 4 40 0.2 According to Google, Advertiser A has the highest Ad Rank, so A wins the auction and gets position 1. The CPC that Advertiser pays is: This explanation is incomplete and incorrect for the following reasons: • Ad Rank is more a product of CTR and bid rather than quality score and bid. For this example, this is referred to as Rank2. Because CTR and quality score are strongly correlated, this modified Ad Rank is not much different from Google’s explanation. Although using QS or Rank2 does affect position in the above auction, it would affect the CPC calculation. Using Rank2 yields Advertiser A an effective CPC of $5.33 (0.8/15%). • The explanation doesn’t answer the question of why bidding substantially higher than the position 1 CPC could still get Advertiser A position 2. • It also doesn’t answer why a lower bid might get Advertiser A the same position but a lot less impressions, especially on the brand words. The actual auction mechanism The actual mechanism is best understood in the following steps. • Advertiser A’s bid and the competitors’ bid determine the auction marketplace. Google uses Advertiser A’s bid and its competitors’ bids to determine which keyword match type and bid combinations participate in an auction at a query level. • When the auction participants are determined, the Ad Rank is calculated based on CTR or a CTR proxy and bids. The CTR proxy that Google calculates is an estimate of CTR at position 1. So if an ad has never seen position 1, Google estimates it. Like any calculation, the estimates could be way off, which in turn could hurt CPC. • If Advertiser A wants to come on the left side of the page (above the organic ads), Google has an artificial threshold to beat. So in a sense, Google’s organic results are competing with Advertiser A for rank. • Finally, CPC is determined by the formula discussed above. This modified auction mechanism explains the questions posed above: • The bid and CPC are more decoupled than typically thought. The bid determines the type of advertiser competing in the auction. A very high bid on a broad match keyword means participation in many auctions, which means more impressions and clicks. This explains the observed drop in impressions, even at the same position (1.01 to 1.09) • The CPCs observed for position 1 and position 2 are independent, because the participants for those auctions were different. Although Advertiser A bid higher than the position 1 CPC, Advertiser A could get position 2 because Google let another high-bidding advertiser participate in A’s auctions when A was bidding low. You cannot calculate the CPC at position 2 just by looking at position 1’s CPC. You must look at the bid and the CPC. Note: Adobe models CPCs by looking at the combination of bid, CPC, clicks, and impressions to get 90%–95% model accuracy. While it appears difficult to model, it’s possible with sophisticated math. The subtle science of bidding Guide 2
- 3. When making bidding strategies and decisions, consider the following. • Bid is far more important than CPC. Bid determines CPC and the competitors in the auction marketplace. • Position is only an artifact of the auction. It doesn’t determine anything, so don’t pay undue attention to it. Instead pay attention to bid, CPC, clicks, and ROI. They are the true performance metrics. • Dramatic bid changes can adversely affect the CTR estimates that search engines make on keywords as they move positions. This can hurt CPCs. • A strategy of bidding brand keywords high to position 1 could be very detrimental for performance. Typically, this strategy leads to higher CPCs but not many extra clicks. Hence, effective management of an SEM campaign requires close monitoring of all keywords in the account, including the brand. Brand keyword management Many SEM managers believe that brand keyword bid management is easy. Because the ROI on these keywords is so high, many SEM managers just bid these keywords to a high level and then leave the bids alone. This strategy can be very inefficient. An Adobe client wanted to test this hypothesis by bidding their exact match brand keyword from 1.05 to exactly 1.0 at the end of April. The data presented has been normalized, but the trends are exactly what we saw. When the bid was raised by 20%, the impressions increased. However, looking historically, the impression volume was not abnormally high. On the CPC and conversion side, however, some dramatic trends were observed. On the third day of the bid change, CPCs shot up three times with a simultaneous conversion rate drop. The net result was that ROI tanked. The subtle science of bidding Guide 3
- 4. Most SEM managers do not realize that there’s a big difference between position 1.0 and any other position. For instance, take the average position of 1.05. At this position, position 1 is not achieved 5% of the time because the search engines are experimenting with other advertisers at this position. If the goal is position 1 all day, the search engines charge a huge premium for denying them the chance to experiment. Moreover, when bidding very high, you participate in more auctions, many of which aren’t relevant. As a result, the quality of clicks is lower, and conversion rates drop. While in theory this is only supposed to happen for broad match keywords, the above example shows that this is not always the case. You might ask, “Why do the search engines want to experiment with position 1?” One reason is that search engines need to constantly refine the quality score estimates for all advertisers. Remember, quality score is based on the estimate of CTR at position 1. If an advertiser has not seen position 1, the search engines base quality score on an estimate that could be quite wrong. Here is another example, this time from Bing. The branded keyword was bid to $1 every day. On February 11, the bid was brought down to $0.26 due to an impression volume drop. When the bid was raised again, the impression volumes recovered, but a much lower position at a higher CPC was observed. When the bid was lowered, the impression volumes fell, and Bing’s CTR estimate at position 1 was inaccurate. As a result, Bing estimated a much lower CTR than before, so they began to charge a much higher CPC at the same position. What is the advertiser to make of all this? • Bid management for brand keywords is complicated. Due to the subtleties involved, you need a very sophisticated approach to managing brand keywords. • An off-hand approach to brand keyword bid management does not work. The traditional strategy of bidding all brand keywords very high can be detrimental, leading to higher CPCs and lower conversion rates. Moreover, advertisers are exposing themselves to the whims of the search engines. Smart brand keyword management requires a highly accurate and precise bidding strategy just like non-branded keywords. Using sophisticated mathematics, you can build keyword bid, CPC, clicks, and performance trade-off models to 90%–95% accuracy. The subtle science of bidding Guide 4
- 5. • Position 1.0 is usually very expensive. The commonly held notion that position 1.0 and 1.2 are very similar is wrong. The search engines charge a much higher CPC for position 1. It’s almost always better to be at position 1.05 or lower than position 1.0. While the point is subtle, its effect on brand keyword performance is huge. This also means that you must model out keyword performance at the high positions with a lot of granularity. Second-order effects Many marketers like to think that each keyword operates on its own and that its performance is a function of its own bid, CPC, impression, and ROI trade-offs. However, the truth is that for effective campaign management, you must look at keywords simultaneously to make smart decisions. Simultaneous keyword management has two parts. One is the bid management piece. Assuming the exact bid, CPC, and performance trade-off for every keyword are known, look at the trade-offs of all managed keywords at the same time to make optimal bidding decisions. The outcome of this approach is called Portfolio Theory, a rigorous mathematical method that guarantees the best outcome for any goal. The details of this method are covered in the white paper “Algorithms and Optimization.” The other part is second-order effects: understanding keyword performance trade-offs due to decisions made on other keywords in the campaign. Consider a Google brand campaign where the bulk of traffic came from three broad-matched brand keywords. Clearly, December 6 was a disaster. Not only did impression volume tank from 500,000 impressions to 150,000, but spend went up from an average of $600 per day to $12,000. The first clue to what happened comes from the impressions. On a usual day, the bulk of the impressions came from Brand 1, but on December 6, its impression volume decreased dramatically. The bid, CPC chart below provides more insight as to what happened. The subtle science of bidding Guide 5
- 6. On a usual day, brand keyword 2 was bid between $2 and $4. However, on December 6, in an attempt to increase traffic on Brand 2, the advertiser increased the bid to $7. What this advertiser had not modeled out was the effect of this bid change on the search engine algorithms. The search engine squelched traffic from Brand keyword 1 and increased traffic on Brand keyword 2. Unfortunately, not only was the overall traffic much lower than before, it came at the cost of a 10-fold higher CPC. The net effect was one-quarter the average number of impressions (and clicks) at 20 times the expense. There was no indication that this would happen. A previous experiment on December 2, where the bid on Brand keyword 2 was increased to $5 yielded no performance change. Key takeaways for the advertiser: • Consider the effect of bidding decisions on keywords simultaneously. Looking at keywords in their own silos can have unintended consequences. From the portfolio management perspective, not making simulta- neous keyword-level bidding decisions leads to suboptimal performance. • You must actively manage brand keywords. Brand keywords need active campaign management. This example involving brand keyword corroborates the point. • Optimization and automation are prerequisites for effective management: In an ideal world, where search engine algorithms behaved predictably with high transparency, management of small keyword sets involving hundreds of keywords would be relatively simple. However, given the realities of the marketplace and search engines, even small campaigns need sophisticated optimization and automation. The example above involved one brand and three keywords. Imagine the complexities of managing 20 or more brands with hundreds of brand variations. About the Adobe® Digital Marketing Suite The Adobe Digital Marketing Suite offers an integrated and open platform for online business optimization, a strategy for using customer insight to drive innovation throughout the business and enhance marketing efficiency. The Suite consists of integrated applications to collect and unleash the power of customer insight to optimize customer acquisition, conversion and retention efforts as well as the creation and distribution of content. For example, using the Suite, marketers can identify the most effective marketing strategies and ad placements as well as create relevant, personalized and consistent customer experiences across digital marketing channels, such as onsite, display, e-mail, social, video and mobile. The Suite enables marketers to make quick adjustments, automate certain customer interactions and better maximize marketing ROI, which, ultimately, can positively impact the bottom line. About Adobe Systems Incorporated Adobe is changing the world through digital experiences. For more information, visit www.adobe.com. Adobe Systems Incorporated Adobe and the Adobe logo are either registered trademarks or trademarks of Adobe Systems Incorporated in the United States and/or other countries. All other trademarks are the property of their respective owners. 345 Park Avenue San Jose, CA 95110-2704 © 2012 Adobe Systems Incorporated. All rights reserved. Printed in the USA. USA www.adobe.com 91072761 6/12