SEM Top 10: Bid for Profit, Not Position

Faced with the bid spasms of some of their competitors, marketers may be tempted to measure their success by the most readily visible metric: position on the page.

But bidding to position is dangerous. Clicks typically do rise with position, but sales per click may not. Worse, this approach to bidding ignores data that are essential to performing successful bid calculations.

If you’re Coca-Cola, the size of your Google spend relative to your investment in, say, TV is small enough to let you go for the number-one position at any cost. But for the typical direct marketer, a more nuanced approach is called for.

Responding to a competitor’s bid spasms can be just that: a dangerous twitch very much like the movements favored by stock market day traders. These momentum investors often flame out in the long run.

If you want your paid search program to profitably endure, it pays to adopt the measured stance of a Warren Buffet. Applied to search marketing, the mode of the value investor dictates taking a scientific approach to your own business and the competitive marketplace.

There’s neither art nor science to bidding for position. Indeed, the engines make it easy; within Yahoo! Search (formerly Overture), the dashboard lets you do just that.

But bidding wars benefit the engines, not retailers: Convince more than three advertisers than they need to be in one of three top positions, and the race is on. This kind of competition can mean economic devastation for your search program.

Consider this comparison to the 20th-century arms race: The former Soviet Union had a nuclear arsenal capable of razing the world many times over, but locked into competition, it kept upping the ante, eventually bankrupting itself. Worth keeping in mind the next time you’re tempted to race a competitor up the page.

The smartest marketers realize that just as in their offline programs, success in pay-per-click advertising depends on managing to target efficiency. As always, applying the fundamental economics of your business is key: For retail sales, subtract cost of goods sold, ad cost, and variable expense to compute ad-level profitability. For businesses using paid search for lead generation, divide ad cost by lead to compute cost per lead.

Given the foundational role of cost, your data must be accurate—let alone relevant. Make sure your internal team or search provider is reconciling ad cost with the authoritative data provided by the engines themselves. If you or your vendor relies exclusively on internal data to report on clicks and cost, you’re not capturing the reality seen by the engines, upon which your actual search advertising fees are based.

With fundamental profitability metrics in place and all data, including cost, audited for accuracy, your program is ready for more-precise adjustments. How will you deal with the debut of new terms that have yet to receive an order? Where is the threshold for lowering or raising a bid, and within what window of time?

The answers to these questions matter. For example, consider a retailer of high-end goods for whom conversion follows careful consideration. Suppose its target ad/sales (A/S)ratio is 20%. Suppose that in week 1, a given term incurred $200 of cost with $0 of associated sales. Should bids for the term be decreased?

Suppose that in week 2, the same term again incurred $200 of cost and but generated a $4,000 order. Depending on the retailer’s interval for term evaluation, the A/S ratio is either infinity or a very attractive 10%.

We painted our example with broad strokes and for a single term, but real-life ambiguities play out across thousands of search terms. The need for statistically relevant rules to govern your efficiency-based program is clear, and the effort will pay off.

Next week, we’ll take a closer look at a key SEM analysis: the performance of brand vs. nonbrand terms. See you then!

Alan Rimm-Kaufman is founder and Lawrence Becker is vice president, marketing and business development for The Rimm-Kaufman Group (www.rimmkaufman.com), an online-marketing consultancy based in Charlottesville, VA.

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