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If you’ve been an advertiser in AdWords for more than a few months you have likely noticed that over time your cost-per-click (CPC) has increased, even for the same average position on the exact same keywords. This can be a major frustration for many advertisers and begs the question “Will CPC ever stop increasing?”

Why Is CPC Increasing

In a word: competition.

With the growth of the internet, especially via smartphones, more and more businesses are advertising online. This means more advertisers for a specific keyword.

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AdWords is roughly an auction, so more bidders usually drives up the price when quantity is limited (only 4 ads above the organic results and 3 below instead of the old setup with 3 ads above the organic results and 8-11 on the right side).

Existing advertisers see their positions start to slide and increase their bids to prevent losing the business they’ve been getting. This process continues and CPCs spiral upward. It’s just basic supply and demand economics.

Can CPC's Increase Forever?

Of course CPCs can’t increase forever. It’s just like any other auction where each bidder has a different price at which they drop out.

For simplification, let’s consider the keyword “air conditioner repair” and we’ll say that our prospective customer is in Casper, Wyoming.

Here are the advertisers who want to appear in positions 1-4 on the first page, with the statistics they’ll use to set their bids:

  • Local Company #1 – average customer value is $200 and they convert 25% of leads
  • Local Company #2 – average customer value is $200 and they convert 20% of leads
  • Local Company #3 – average customer value is $250 and they convert 10% of leads
  • National Company – average customer value is $150 and they convert 33.3% of leads
  • National Lead Aggregator – average customer value is $75 and they convert 50% of leads

If we assume that each advertiser above is willing to spend 50% of the customer value on acquisition, then we can calculate cost/click.

Cost is the highest amount they’re willing to pay, so average customer value multiplied by 50%.

To get a lead they need to divide by their conversion rate to find the number of clicks it would take:

  • Local Company #1 – $200 x 50% / (100 x 25%) = $25.00 CPC bid
  • Local Company #2 – $200 x 50% / (100 x 20%) = $20.00 CPC bid
  • Local Company #3 – $250 x 50% / (100 x 10%) = $12.50 CPC bid
  • National Company – $150 x 50% / (100 x 33.3%) = $25.00 CPC bid
  • National Lead Aggregator – $75 x 50% / (100 x 50%) = $18.75 CPC bid

This would imply that our 4 ad spots, from top to bottom would be LC1, NC, LC2 and NLA with LC3 getting left out.

What Makes CPC's Go Up?

The above example is very simplified, but even at the simplest level it becomes quite easy to see how the CPC war escalates.

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With only 4 top of page ad placements, our “loser” Local Company 3 could decide to dedicate a higher percentage of the customer value to acquisition, pushing another advertiser down. That advertiser then dedicates a higher percentage to advertising and we have a good ol’ fashioned bidding war on our hands that eventually envelopes all 5 advertisers.

Even if an advertiser wanted to keep at 50% of customer value to acquisition, they might implement changes to their call center or lead nurturing funnel to increase conversion rates. That would allow them to bid higher while still only spending 50% on acquisition. Or perhaps they got better at upselling maintenance plans and increased the average customer value? As you can see there is constant upward pressure on CPCs.

How You Win The Adwords Bidding War

The ultimate victory lies in having better conversion rates and higher lifetime customer values than your competitors. Those are the 2 factors that would allow you to “win” a bidding war.

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However, some advertisers may choose to use guerrilla tactics instead. Some strategies for winning specific battles include the following:

  • Target narrow times of day where customer value is higher
  • Target higher customer value keywords (most likely long-tail and not being specifically targeted by competitors defending multiple positions)
  • Lose money on initial client acquisition and make it up on subsequent purchases or services (the SaaS industry and insurance industry are notorious for this)

As you can see, you either target very narrowly (sniper) or accept very high costs, but the idea is to choose your battles wisely to “win” on your own terms.