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Managing an effective paid search campaign is seven-parts math, two-parts effort and one-part intuition. Because “pay-per-click” advertising is transactional in nature (you pay “per click”), your bidding strategy is formed by knowing and adjusting to the economics of your website.
Setting bid positions is not an arbitrary decision, right? Correct, it involves clearly answering these four interdependent questions:
1. What is my objective?
2. What is my objective’s value?
3. What user type do I intend to attract?
4. How does my competition behave?
What Is Your Objective?
Have you heard the cliché, “start with the end in mind”? Your first step in determining an effective bid strategy is defining your objective.
What do you want to achieve from your paid search campaign? What action do you want visitors to perform after they click through to your ad? Do you want to increase email opt-ins, ensure higher profit margins, generate webinar registrations or sell more products?
Clearly state your objective (and the action you want performed).
What Is Your Objective’s Value?
After defining your objective, calculate a “dollar value” for its completion.
For example, if your objective is to increase email opt-ins for a follow-up email marketing campaign, figure out how many emails you need to send to generate one sale. If 50 emails generate one sale and your average sale price is $250 then the “value of an email” is…
$250 Average Sales Price Divided By 50 Email Opt-Ins = $5.00 Objective Value
Next, determine your maximum bid per visitor while remaining break-even with your objective’s value. Do this by calculating your current conversion rate, which is defined as the number of actions (e.g., email opt-ins) divided by the number of website visitors within a specific period of time. If you don’t have this data, use a conservative estimate like 6% for an email opt-in or 0.5% for a product sale.
Using the example, 5% of website visitors opt-in – so out of 20 visitors; 1 provides their email address.
Now, calculate the maximum bid price per visitor to remain break-even:
Maximum Bid Price Per Visitor = Objective Value X Current Conversion Rate
In the example, a $5.00 objective value times 5% conversion rate equals $0.25 maximum bid price per visitor. Therefore, a bid equal to or less than $0.25 will remain break-even with the objective’s value.
What User Type Do You Intend To Attract?
User search behavior has adapted over time to the search engines’ ad segmentation. With Google leading the foray of including varying ad types such as Froogle and Local listings on their search engine results page, users have slowly educated themselves on where to find the most relevant ads. The bid position you choose influences the type of user you’ll attract.
Most advertisers arbitrarily target the first and second bid positions. Yet, research and experience shows that often the first and second bid positions attract causal and newbie “sport-clickers”, while listings further down the page gain the attention of goal-oriented buyers.
Although there are no hard-and-fast rules across all markets, bid positioning is an important consideration in your bidding strategy. If you set an objective “to close sales”, consider how your customers search for your type of product or service. Do they need to research prior to buying or is it an impulse purchase? Test different positions while watching your conversion rate closely. You may discover that a cheaper, lower bid position provides greater results.
How Does Your Competition Behave?
Analyze your competitive bid landscape. Do you have a big-budget competitor that places a ridiculously large max bid to monopolize the first spot? Do you have a group of competitors constantly leap-frogging each other for bid position? Do you have “sleeper” competitors that cause large bid gaps between bid positions?
Watch your competition closely and how they behave to bid challenges.
If you detect a big-budget competitor, “jam” their bid by bidding one penny less than their max bid and thereby force them to pay an extreme price for the first or second position. Be on your toes though – they may return the favor.
If you have a group of competitors in fierce combat, slip into the fourth through seventh positions below their radar. The sixth position on Yahoo! Search often delivers tremendous value because the Sponsor Search control console only displays five bid positions. Let your competition battle it out while you generate strong conversions at below-market prices.
If you have a lazy competitor, find the bid gaps and secure a strong position at the lowest price possible.
Bringing It All Together To Build The Best Bid Strategy
Now you have the insight to form an effective bid strategy. Your next and final step is the most important. The greatest bid strategy to apply is focused and continual effort.
Concentrate your effort on paying attention to competitor behaviors, watch for trends with your conversion rates at varying bid positions, constantly calculate your performance metrics (like cost per action) and test new ad copy and keywords. Coupled with the insight gained from your “math”, add effort and intuition to build a world-class paid search campaign.