Google AdWords Bidding Tutorial

>> VARIAN: Hi, I'm Hal Varian, the Chief Economist here at Google. Today, I'd like to talk to you about bidding strategy on google.com. Pay-per-click search advertising is a great way for advertisers to drive relevant traffic to their sites. But knowing how much the bid for those clicks could be a challenge. In this lesson, I'll show you how to figure out your value per click and how to use that value to maximize the profits from your marketing investment. When you advertise on Google, you probably have a goal in mind for your advertising. So that goal may be the sale of a product, a new lead, a sign-up, or getting a user to view or download some material on your site. Each time a user who clicks on your Ad completes one of these goals, they've given you a new conversion. You should be able to tribute a value to each of these conversions. So for example, you may sell a digital camera in your site for $300. Let's assume that each camera has an additional wholesale cost of $200 to you. Therefore, a conversion for a user who buys a camera in your site generates a $100 worth of revenue for you. This is the price a user paid, $300, less the cost to you, $200. That $100 revenue is your maximum profitable Cost Per Acquisition or CPA. You could pay up to $100 for each conversion and still make a profit on the sale. In general, however, you don't bid by CPA on Google. You bid by CPC or Cost Per Click. So you need to convert your maximum profitable CPA into maximum CPC bid. So the first step is to determine your conversion rate. The conversion rate's the number of conversions completed in your site, divided by the total number of Ad clicks to your site. You can use the AdWords conversion tracking or a website analytics tool like Google Analytics to get out this data. So let's say that for every 100 people that clicked on your Ad, you get 5 conversions, 100 people, 5 conversions. In this case, your conversion rate would be 5%. The next step is to calculate your value per click. This is the value that you can expect on average for each click to your website. So you can calculate your value per click by multiplying your value per conversion times your average conversion rate. So your value per conversion times your average conversion rate gives you the $5 value per click. This means that on average, each click to your website has an expected value of $5. If you were to pay $5 for each click, it expected just breakeven on your marketing investment. The value per click is the expected profit from a current visitor to your website. You might want to bump this value up a bit to reflect the fact the visitor might not convert on this particular visit but may return in a future to buy something, how big an adjustment you need to make will depend very much on your particular product or service. Because of the nature of the AdWords auction, you'll never pay more than your max CPC for each click and generally, you'll pay less. So by bidding at your value per click you know that on average you'll make a profit, or at worst, breakeven on your marketing investment. Well, bidding at your value per click would generally lead to profitable results. It may not produce the maximum possible profit for your marketing investment. To see how this works, let's look at some sample data using a new tool called bid simulator. Bid simulator let's you see the estimated number of clicks and the total costs of those clicks for various bid levels. At the end of this video, we'll include a link so you can learn more about bid simulator. You can also get this data by experimenting with different bid levels at or near your value per click and keeping track of the clicks on cost associated with your bid. Suppose we start out bidding at our value per click, $5. Here, we get 208 clicks at a total cost of $697.42. Since our value per click is $5, the expected revenue from those 208 clicks turns out to be $1040. We subtract the cost of those clicks, $697.42, to get our expected profit, $342.58. So we know that our $5 bid per click was profitable. But was it the most profitable bid? Using data for bid simulator or from your own experiments, we could see how many clicks we could have potentially received at different bids. And how much those clicks would have cost? In our spreadsheet, we could fill in the revenue column by multiplying our clicks by our value per click and see which bid generates maximum profit, using the same calculation we just did. So we see that a bid of $4.50 makes more profit than a $5 bid. And that a $4 bid makes the most profit. In this case, we want to lower our bid. Of course, it could be that you'd started out bidding $3 per click. In that case, you would be bidding too low. So it makes sense for you to increase your bid to $4 in order to get the most profitable situation. The reason that a max bid of $4 generated more profit than our initial $5 bid was because the incremental cost with the clicks we got at the higher bid exceeded the incremental value of those clicks. That is the additional cost of gaining a click was more than the revenue we generated from them. That ratio, the cost of incremental clicks divided by the number of incremental clicks is called the incremental cost per click or ICC. Whenever your value per click is less than the incremental cost per click, it will pay you to lower your bid, in order to reduce your cost. Conversely, if your value per click is higher than your incremental cost per click, you should increase your bid. Let's go over how we calculate the ICC for a given bid. To start, we take the estimated total cost for that bid. For a $5, that's $697.42. Then subtract total cost at the next lowest bid. In our example, the next lowest bid is $4.50 with the total cost of $594.27. The difference between these two numbers is $103.15. Then you divide that number by the number of additional clicks you gain at the higher bid. In this example, we got 208 clicks at a $5 bid and 190 clicks at a $4.50 bid. So we gained 18 clicks. Dividing those two numbers, $103.15 by 18, we get an ICC of $5.73 that means that each additional click of your $4.50 bid to your $5 bid cost $5.73 on average. We can repeat that process for the rest of the bids in our spreadsheet and see the ICCs for each bid. You could see the ICC at our $4 bid is the closest value to our $5 value per click without going over. So it's going to bring in the highest profit. Actually, in this example, you probably want to bid at a little bit more than $4 so you get your ICC as close as possible to the $5 value per click. You may have noticed in our chart that the incremental cost per click is generally higher than your maximum bid. But we said that you never pay more for a click than your maximum bid. This happens because increasing your bid may help you to get some new clicks at a cost close to your old bid. But some of your old clicks may come at a higher cost as well. And maybe because your Ad wins a higher spot in the auction or because you're appearing in more expensive auctions that you did then or your lower bid. So let's go through a quick example to see how this works. In this example, we have an initial bid of $4.50 and we get 3 clicks for a total cost of $11.30. When we increase our bid to $5, we gain two additional clicks and our total cost goes up to $21.60. So the incremental cost per click is $5.15. Higher than our max bid of $5 but no individual click cost more than our max bid. By calculating your ICC and value per click, you can be sure that you're bidding at or near the profit maximizing level for each of your keywords. Now overtime, conversion rates would change to the economic conditions, seasonal conditions, and the like. For example, the conversion rates for skis goes up in the winter. Hence, you should track your value per click carefully. The values and bid simulator may also change. So you should keep a close watch on those numbers as well. It pays to redo these calculations on a regular basis to make sure your bids are optimum. So to recap our discussions, the steps you should take to maximize the profit from your marketing investment are one, determine your max profitable CPA; two, determine your conversion rate; three, calculate your value per click; and four, adjust your bids so that value per click equals incremental cost per click. I hope that this discussion has helps you to understand more about cost per click bidding. To learn more about bid simulator and how it can help you to optimize your keywords, visit the link at the bottom of the screen. Thanks for listening.