Most agencies managing SEM accounts use software to calculate bids based on a business goal. If you are responsible for advertising costs and ROI, you may have wondered how PPC bids are actually calculated. For example, what are the variables involved in calculating a PPC bid? What can a SEM manager do to impact these variables? To answer these questions, I first identified variables that affect PPC bids and then considered what I might do to affect them in positive ways.
What Variables Directly Impact PPC Bids?
The following variables strongly impact PPC performance and should play a role in your PPC bid calculations.
- Revenue/Conversion – How much revenue will a conversion generate on average? This is defined by the products on the web site. The higher the revenue per conversion for an ad group (or keyword), the higher your calculated PPC bid should be. In general, bids for groups promoting expensive products will be higher than bids for groups promoting less expensive products.
- Conversion Rate – How often does a visitor to your site make a purchase? Conversion Rate is a metric near and dear to every digital marketer’s heart, but it’s also one that is difficult to manipulate. Assuming the traffic sent to the web site is relevant traffic, then the Conversion Rate is determined primarily by the business itself: brand strength, product demand, product pricing. Naturally, higher Conversion Rates tend to increase calculated PPC bids.
- Performance Target – What is the client’s business model? Every business has its unique ROI goal based on the profitability of products being marketed and sold. Higher ROI goals decrease PPC bids as you work to improve efficiency; lower ROI goals increase PPC bids and allow you to capture greater volume and impression share.
How can a Search marketer influence these variables?
- Revenue/Conversion – As explained above, revenue per conversion is not a variable that search marketers can easily control — it’s defined by the products being promoted and the pricing. SEM managers may not be able to change product pricing, but there is one tactic they might employ to influence overall account ROI performance: focus a greater percentage of advertising cost on products with favorable ROI. If you have a fixed budget and the freedom to choose how that budget is spent, this tactic may improve overall account ROI.
- Conversion Rate – I stated above that Conversion Rate is influenced primarily by brand strength, product demand, and pricing. There are, however, two other factors that SEM managers can affect:
- Quality of Traffic: a good SEM manager will create campaigns with relevant traffic in mind. Each campaign should be constructed with tightly-themed ad groups, appropriate keyword match types, negative keywords, compelling ad copy, geo targets (physical location), and device targets (mobile/PC/tablet). Click-through rate is the primary indicator of traffic relevancy.
- User Experience. Even if the traffic sent to the web site is absolutely relevant, user experience on the site strongly influences how often visitors convert. There are many variables that affect user experience, most notably product page content and layout and site navigability. It’s important to employ a multivariate testing solution like Webtrends Optimize to perfect your site’s user experience. Even the smallest lift in Conversion Rate can translate into significant revenue over time.
- Performance Target – Every business has its own Cost of Goods Sold, and its unique ROI target for PPC advertising. At first glance, one might think that this is set by the client and cannot be manipulated by the SEM manager. This is not strictly true. Clients often dictate an overall ROI goal, but not all promoted products will hit this goal exactly: some ad groups will significantly exceed the goal, while others will perform below goal.
- Optimization Problem: It’s the SEM manager’s challenge to meet the overall ROI goal, while maximizing volume and revenue (within budget constraints). This means that the optimal performance target for calculating a PPC bid will vary according to historical performance of the ad group in question. If you consider that there can be many thousands of bids to calculate in a large account, you begin to appreciate the complexity of the problem. One good approach is to segment ad groups into buckets with similar performance over time and base performance targets for bids on average metrics for the bucket. How your optimization strategy is executed will have a significant impact on both ROI performance and account volume and revenue growth over time.
- It’s a problem that our Campaign Optimization team here at Webtrends loves to work on! Feel free to reach out to us if you’d like to discuss in greater detail.