Paid Search Marketing Tips

Bid Management Basics

One of the most fundamental questions a pay-per-click (PPC) search advertiser must answer is “How much should I bid?” When dealing with hundreds, thousands, or possibly tens of thousands of keywords, each with independent bid levels, the question becomes even more complicated. But there are some basic concepts that can guide you to making the right bid decisions for the keywords in your campaigns.

ROI vs. Position Bidding

Most experienced search marketers are now using ROI bidding strategies rather than position bidding. If being in a top position makes your campaigns unprofitable, do you really want to be there? If you’re a large branding advertiser, maybe you do. But for most of us, we are trying to make money rather than lose it. So, ROI bidding strategies will be the focus of discussion in this article.

There are two primary types of ROI bidding strategies: 1) targeting a Cost Per Action (CPA), or 2) targeting a Return On Ad Spend (ROAS). Below are the formulas that allow you to calculate each. . .

CPA = Cost / Actions (typically used for lead gen campaigns)
ROAS = Spend / Cost (typically used for ecommerce campaigns)

I’m going to assume that most marketers already know how to determine the CPA or ROAS that they want to target. But if you don’t, you can use the current average CPA or ROAS of your campaign and attempt to drive more actions or sales while maintaining your ROI ratios.

Foundational Formulas

Once you have determined your target ROI metric, you can begin to figure out how much to bid on a Cost Per Click (CPC) basis for each of your keywords. For the rest of this article, I will use an example CPA campaign. But with some basic algebra, you should be able to apply the same principles to an ROAS campaign.

Let’s assume we are running a lead gen campaign and over the last 30 days we show an average $1 CPC and an average click to conversion rate (CVR) of 10%. Using these two variables, we can determine our CPA using the following formula. . .


So, in our case $1.00 CPC / 10% CVR = $10.00 CPA. Simple stuff, right? But when setting bids, we already know what CPA we want to hit, so this formula isn’t of much help. We need a formula that calculates a recommended CPC, not CPA. This is easy to get by simply rearranging the same formula as shown below.

CPC = Target CPA * CVR

If we’re targeting a $10 CPA and a keyword tends to have a 10% conversion rate, this formula will quickly and easily tell use that we want to pay $1 CPC to achieve our target CPA. If you can understand this basic formula, you are on your way to becoming an effective PPC search marketer. Unfortunately, this formula doesn’t answer all of our questions. There are still a few other variables that we will need to consider. . . such as tomorrow’s conversion rate.

Forecasting Conversion Rates

The hard fact is we don’t know what future conversion rates will be. But we can make a fairly accurate prediction by looking at historical conversion rate data. If conversion rates for one of your keywords have stayed between 8% to 12% every day for the past 60 days, you can be fairly certain that it will be within the same range tomorrow. So forecasting tomorrow’s conversion rate at 10% will likely get you very close to your target CPA. However, this kind of historical analysis is not going to work for all of your keywords, specifically your long-tail or low-volume keywords.

You likely have in your keyword groupings hundreds of low volume keywords that might only get single digit click numbers each month. While they drive very few transactions by themselves, they can have a significant impact on your campaign performance in aggregate. In other words, you don’t want to turn them off. But that is exactly what will happen to many of them if you base your CPC bids on recent conversion rates. If a specific keyword has received two clicks and no conversions over the last 30 days, the keyword will have a 0% conversion rate. Using the formula discussed in the previous section, this would lead you to a $0.00 CPC bid.

To resolve this problem, you need to manage your long-tail keywords differently. A common solution is to use the average conversion rate for all keywords in a campaign or ad group to calculate the CPC bid for all keywords under a specified click threshold. So, if your entire campaign shows a 10% conversion rate, you might want to apply this average conversion rate to all keywords with under 50 clicks in the last 30 days.

Other Variables to Consider

While the above strategies and formulas will give you a good start to making effective bidding decisions, there are still many other situations that will require you to depart from basic bidding strategies.

  • When forecasting future conversion rates, do you want to base estimates on yesterday’s conversion rates? Last month’s conversion rates? Last year’s conversion rates? Each time frame will likely give you a different conversion rate estimate, and not all time frames will accurately predict future performance.
  • When placing a bid with a search engine, you define the maximum CPC you are willing to pay. This does not mean that you will actually pay that amount. The nature of bid gaps between ad positions may make it impossible to pay the exact CPC necessary to achieve your target CPA or ROAS.
  • Do your conversion rates tend to fluctuate predictably depending on the time of day, day of week, or season of the year? While it’s not always an easy process to analyze such trends, they can help you achieve even further bidding efficiencies in your campaigns.

PPC search marketing is not rocket science, so don’t get intimidated. Any competent online marketer should be able to apply some logical bidding strategies and achieve success in their search marketing campaigns. But it will take time and diligence. Pay close attention to your conversion rates and don’t get emotional about the importance of low-performing keywords. Let the numbers be your guide.

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