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PPC case study: A masterclass on how to adjust your bidding strategy for maximum profit
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PPC case study: A masterclass on how to adjust your bidding strategy for maximum profit

by Philip Armstrong7th November 2014

Bid optimisation involves manually altering the bids for each individual keyword within a campaign in order to ensure that clicks that your Ads receive are profitable. Bid optimisation allows you to maximise the number of conversions you gain, while minimising the cost of acquiring each conversion – allowing you to maximise your revenue.

The objective of Bid optimisation is to find the sweet spot between these two extremes:

A very low Max. CPC will generate few but extremely cheap clicks for our Ads, which will give us a big margin but few conversions/ sales

A very high Max. CPC will generate many but extremely expensive clicks for our Ads, which give us a smaller margin, but very many conversions/ sale.

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Step 1: Find out what your break even CPC is

Discovering the maximum amount you can bid without clicks on your Ads becoming unprofitable is a good starting point. Once you know the break-even CPC for a given keyword, you know that as long as you Avg. CPC is below this number, that you will be making a profit.

To figure out the break even CPC for a keyword use the following formula:

Conversion value x landing page conversion rate

Let’s look at an example:

We have a website which sells insurance and an insurance sign up is worth £30 to us. Now, let’s say that historically for the keyword “cheap insurance”, we get a landing page conversion rate of 20%.

£30 x 0.20 = £6

So if we were to pay an Avg. CPC of £6, we would break even, and anything less than £6 puts us in profit on average for that click. You can also see your Cost/ Converted Click in Adwords, which should be less than your Conversion Value.

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BUT what is the Max CPC which will maximise our profit? £2? £4? £5?? What is the optimal bid for this keyword??? This leads us on to the next step:

Step 2: How to Find the Optimal Keyword Bid That Maximises Your Profit

If your aim is to maximise the profit that your campaign generates, then it’s essential that you find the optimal Max Cost-Per-Click for each of your keyword.

Remember…

While bidding less will increase your margin,

Bidding more will generally increase the number of clicks your Ads get, and as a consequence increase the number of sales generated.

It’s a trade-off, and the key is to find the perfect balance, and the perfect Max. CPC.

Let’s look at an example:

  • Imagine we’re bidding on the term “holiday insurance”.
  • Our Avg. CPC is £2 (our Max CPC for this keyword is set to £2.50, but we don’t always end up paying our maximum bid)
  • Our Ads for this keyword generate 100 clicks a day
  • 25% of the visitors to our landing page via our Ads sign up for a policy
  • We earn £30 every time a visitor to our website signs up for a policy

Using this information and the following formula, we can determine the profit generated from this keyword:

( Clicks x conversion rate x conversion value ) – (clicks x avg cpc )

OR

( 100 x 0.25 x £30 ) – ( 100 x £2) = £550 revenue per day

 

So, knowing this, one may beg the question, what would happen if we set our Max CPC 50% higher?

  • We can presume that our Ad Rank would improve
  • Our number of clicks should also improve if our CTR remains the same
  • As we are presumably paying more for a click, our cost per conversion should increase

BUT

Would our revenue for this keyword be higher or lower?

Let’s look at a hypothetical example here to illustrate this point:

CPC-Table

 

So we can see that a Max CPC of £4, which translates into an Avg. CPC of £3 (sometimes we pay more than £3 and sometimes less, but never more than our Max. CPC) for this keyword, generates us the most profit!

Although a Max. CPC of £6, does generate a higher number of Clicks, and a higher number of Conversions, the additional clicks come at a higher price, reducing the margin for each conversion to the extent where the overall profitability of the keyword is reduced.

How to Calculate Clicks and Search Volume for Specific Keyword Bids

You need to figure out how much additional traffic you would attain by increasing your Max CPC by a given % – the two main ways to do this are:

  1. Adwords Keyword Planner – very rough estimations only,
  2. Adwords Bid Simulator – this can give you a rough estimate of how many clicks you can expect, but the calculations can often be misleading.
  3. Through manual testing/ trial and error – testing different bid amounts over extended periods of time and comparing them. This is the most accurate method.

How to Use The Keyword Planner

Go to tools and select Keyword Planner. Along with the keyword/s you want to test, make sure to select the applicable locations, and languages.

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Keyword Planner then allows you to estimate the number of impressions and clicks you will be able to generate with different bid amounts.

graph

The limitations of Keyword Planner however are that the estimates you see if the graph are not based on your own account’s historical data, but are instead based on the average for all advertisers bidding on the keyword in question for the past year.

Keyword planner cannot estimate the difference in cost, depending on your Quality Score.

Since Keyword Planner can only give very rough estimates, it is best to be used only on new campaigns which have very little historical data for keywords.

How to Use Adwords Bid Simulator

To access the Bid Simulator, simply click on the small graph icon which appears next to your Max CPC for a given keyword within the Keywords Tab:

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This icon will only be available for keywords which have accumulated enough data – Bid simulator cannot be used for new keywords or keywords which have been paused for an extended period of time.

Once you click the graphic icon, you will see the following Bid Simulation:

bidsim

Bid simulator compares your current Max. CPC to higher and lower Max. CPCs to give you an estimation of how changing your bid will affect your traffic levels, based on your campaign’s historical data.

Although the estimates are based on historical data, they are still only rough estimates, and should be taken with a pinch of salt. These estimates can give you an idea of the increased number of clicks you can generate by increasing your Max. CPC, but the only way to truly determine which Max. CPC will prove most profitable for a given keyword is to manually test different Max. CPC’s in your campaign.

How to Manually Test Different Max. CPC

When testing the effect that separate Max. CPC’s have on the profitability of a keyword, it’s important to keep all of the other variables consistent, so that you can isolate the effects of the Max. CPC.

Let’s look at some of the variables we should keep consistent:

Ad Text: The Ad Text must be kept exactly the same while the test is being carried out, as the Ad Text directly impacts both the Click-Through-Rate, and the Quality Score, which both in turn affect the Ad Rank.

Landing Page: The landing page is less important to keep consistent, as it has a much smaller effect on the Quality Score, and has no effect on the Click-Through-Rate. The landing page does have a direct effect on the Conversion Rate we can expect from the clicks generated, but since the clicks are the main factor we are trying to gauge with this test, keeping the landing page consistent isn’t absolutely necessary.

Extensions & Settings: Changing the Site-Link and other extensions can affect our Quality Score, and changing the locations, languages, and other settings can affect our Click-Through-Rate, making our test unfair.

The only factor which we cannot keep consistent is the time of year. Level of traffic, click-through-rate, and competition among advertisers can change throughout the year (so if your niche is very seasonal, then you may need to test two identical periods within different years).

Carrying out the test is very simple to do – simply set two different Max. CPC’s during specific date ranges, and then compare the results. Here’s an example of a real life comparison:

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Note: The campaign name and keywords have been redacted

Note: Remember Max CPC is not a metric, it’s an attribute that you select, and looking back at a past date range will not show you what your past Max. CPC was, it will always show you your current Max CPC.

During this experiment, Max CPC for all keywords were increased – all other campaign settings and features stayed the same, including landing page, Ad Text, schedule, etc.

Let’s focus our attention on Keyword 1.

During the 52 day period of 16/06/14 – 05/08/14: The Max CPC for Keyword 1 was manually set to £3.30

During the 52 day period of 16/09/14 – 06/11/14: The Max CPC for Keyword 1 was manually set to £6.44

Looking at the screenshots, we can see quite a few differences between the two periods that potentially may be related to the change in Max CPC?

  • Cost/ spend has increased by 145%
  • impressions have increased by 25%
  • clicks have increased by 78%
  • Converted Clicks have increased by 41%
  • Average position has improved from 2.1 to 1.5

However, a useful way of quickly estimating whether the new Max CPC for this keyword is more profitable than the last, is by determining the Incremental Cost per Click (ICC):

The ICC is the mean average cost of the additional clicks that your Ads have received as a result of your increased Max CPC.

Let’s look at how this works in practice:

We can see in the experiment above, that we generated 353 additional clicks, at an additional cost of £1802.17.

£1802.17 / 353 = £5.10

If 20% of clicks result in a conversion (the historical conversion rate of our landing page), and a conversion is worth £40, then each click is worth £8 to us. This is what we call the value per click (VPC).

If the VPC is greater than the ICC: this means we should look to increase our Max CPC

If the VPC is less than the ICC: this means we should look to decrease the Max CPC

So because the VPC for keyword 1 is greater than the ICC, we should look to increase the Max CPC.

But wait?

In the experiment above, didn’t the larger Max CPC generate less profit for us than the previous Max CPC?

Yes!

However… the landing page conversion rate during the second period was lower than expected, which we believe to be due to variance, since the average conversion rate for keyword 1 on our landing page is 20% over a much larger sample size.

Note: Comparisons such as these can never be 100% fair, the time of year was different – allowing seasonality to affect the test; there were variances in conversion rate although the landing page stayed the same; and variances in CTR although the Ad Text stayed the same.

In summary:

There are numerous ways in which we can find the optimal bidding strategy which generates us the highest amount of profit. Some of the methods will produce more reliable results than others, but however we choose to estimate the most profitable bidding strategy possible, the important thing is to continue to test until we are confident that we have found the Max CPC that maximises our bottom-line!

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About The Author
Philip Armstrong

Philip Armstrong is a content writer for the Just SEO newsroom. Having served as an Adword’s manager for a number of paid search campaigns, he is an expert in spending money to make money, and regularly contributes in-depth articles on the latest news and updates on pay-per-click (PPC) matters.

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