Performance-based Bidding Basics
When your campaign is focused on performance, it’s important to understand how adjusting your bids impacts each performance metric. This article covers the basic principles of bidding to maximize performance, and explains how to balance your bidding strategy for different business objectives.
Bidding to balance sales volume and profitability
Conversion rates don’t vary much with ad position so the following trends are important to remember:
- Increasing bids generally results in more conversions at a higher average cost-per-acquisition (CPA).
- Decreasing bids generally results in fewer conversions at a lower average CPA.
- Increasing bids while limited by daily budget generally results in fewer conversions at a higher average CPA.
Prioritizing business objectives
In order to achieve your goals most effectively, it’s helpful to prioritize your business objectives. You can optimize your AdWords campaigns to achieve many different goals, but tradeoffs are often necessary.
For example, consider managing a campaign with the following objectives:
- Aim for ad positions 1-3
- Maximize profit
- Maximize conversions
- Maximize clicks
You might discover that your most profitable CPC bids come from ad positions that are outside the top three.
As another example, consider pairing any of the objectives listed above with the objective below:
- Keep CPA below $10
The CPC bids necessary to keep the CPA below $10 may be lower than the CPC bids that maximize profit, clicks, or preferred ad positions.
Tip
When managing a campaign for someone else, make sure they also understand the tradeoffs involved so everyone is clear on expectations. For example, is their business objective to keep CPA at a certain level, or is it to maximize profit? If it becomes clear that two objectives are conflicting with one another, which is more important to them?
Selecting Metrics to Maximize Profit
With so many options, which AdWords metrics are most effective to help you reach your business goals? Here I’ll discuss two metrics that are important to consider if you’re interested in maximizing profit, and point out some common pitfalls to watch out for.
Value-per-Conversion
Value-per-conversion is the amount of expected profit or value you gain from each conversion. If you can estimate value-per-conversion for a given product or service, it’s a useful benchmark to define the upper limit that you can invest in advertising per conversion before becoming unprofitable.
CPA Targets
CPA targets can be helpful for establishing or maintaining profitability, and are usually set below your value-per-conversion.
Example
If a remote-control helicopter sale is worth $50 profit and any CPA below that is profitable, a $10 CPA target can help achieve a consistent $40 profit-per-sale (after advertising costs).
The Conversion Optimizer allows you to automate CPC bidding for a desired CPA target.
A note about maximizing profit
It’s easier to pick a CPA target that will be profitable than one that maximizes profit. To understand why, consider the example above where any CPA target below $50 is profitable. Which CPA target is most likely to maximize profit: $20, $30, or $40?
In practice, you can’t know in advance. By testing different targets, you can learn which one achieves the optimal balance of profit-per-sale and sales volume.
For a visual illustration, watch this AdWords Bidding Tutorial:
http://youtu.be/jRx7AMb6rZ0
Common ROI targets that are unlikely to maximize profit
- Targets decided in advance of a campaign (e.g., “With $50 profit per conversion, $10 is a good target.”)
- Targets based on traditional rules of thumb (e.g., “Ad spend should be 9% of revenue.”)
- Targets based on other marketing channels (e.g., “E-mail and Search should have the same CPA.”)
While the approaches described above may achieve profitability, they don’t take into account changes in sales volume at higher or lower targets. Measure profitability achieved, then try testing a few different targets to see if you can find a path to better results!