Google has been remarkably successful at promoting Adwords to small businesses. According to the Google investor FAQ page, there are over one million advertisers utilizing the service. The complicated nature of the system has not deterred small businesses from becoming customers. However, Google encourages small business signups for Adwords by only providing rudimentary information about how Adwords works. In particular, little information is provided about the benefits of testing different bid prices.
Adwords Bid Price Model
A key aspect of Adwords that is not fully understood by many customers is the bid pricing model. An Adwords advertiser has to do a bit of digging in order to learn the bid system pricing model is based on a Generalized Second Pricing model. The following advice from Adwords Help only provides rudimentary information on the Adwords bidding system, "When ads appear on the Display Network, the maximum CPC is a key factor in determining whether your ad is placed on your targeted placements. Again, increasing your maximum CPC can improve the chances that your ad will appear".
The Generalized Second Pricing used by Adwords works by charging the advertiser with the highest ranking a penny over the bid of the advertiser with second highest ranking. The person with the second highest ranking pays a penny over the third highest ranking amount, etc. The rankings are based on multiplying bid amount times quality score
|Your Bid||Next Highest Ranking||What You Pay|
The black box aspects of the Adwords bid pricing model make it challenging to determine the optimum amount to bid. While there are numerous software options for bid testing, these automated bidding services are usually out of the reach of a small business. Google offers conversion optimization, but it is only available for campaigns that generate 15 or more conversions per month, a level that not all campaigns can meet.
Overpaying For Adwords Clicks
Given the limited time available to many small business advertisers to test different bid levels, they often lock in on a bid that generates profits and seldom change it. However, never changing bids makes it easy for competitors to push an advertiser into overpaying for clicks. Using the above example in which competitors are bidding $1.60, $1.42, and $0.81, your bid of $1.45 results in paying $1.43 per click. In this simplistic example in which there are only four bidders, the $1.42 bidder in pushing the cost of your clicks up to close to your maximum bid amount. This example that would results in a position that is second from the top of the search engine results page. However, the competing advertiser that is bidding $1.42 is only paying one cent more than the next competing bid, so their cost is only $0.82 per click for the third position on the page. If you dropped your bid to $0.95 the cost per click would decrease to $0.82 and the position on the page would only drop from second to third.
Please be aware that the above example over simplifies the benefits of tweaking bids, as it assumes a limited number of bidders and that all the bids are static. Actual conditions on Google are dynamic due to: 1) advertisers using automated bid systems that constantly test the results of different bids; 2) advertisers using ad scheduling and geographic targeting options to vary bids; 3) advertisers temporarily dropping out of Adwords auctions due to hitting daily or monthly budget caps, and 4) bid tweaking by one advertiser may result in other advertisers revising their bids. Thus, the results of bid tweaking are unlikely to be as dramatic as in the above example.
Shown below is data from the keyword summary from a campaign being fielded by InstallationTools.com. For the term "electric carpet stapler" they are bidding $1.29 and paying an average of $0.86 per click. Considering that they are only paying an average of $0.51 for the more generic term "carpet stapler", this is an example of a term where a competitor may be pushing up the cost of their clicks. It seems appropriate for them to test the results of setting their maximum bid at $1.09 and $0.84. While lowering their bid for "electric carpet stapler" will likely result in their dropping from an average position of 1.3 on the page and a reduction in clicks, the lower cost per click could lead to improved profitability. If the test produces negative results, they can revert back to the original bid.
The profitability of an Adwords campaign can be enhanced by testing differing bid prices. Leaving bids unchanged permits competitors to push your cost of clicks upward by setting their bids just below yours. While manually testing bid prices on Adwords can be time consuming, the reduction in cost can be substantial. Further, it provides a sense of competitive gratification to inhibit the capability of competitors to push up your spending.