Value-Based Bid Testing Applied in the Real World
This is the fifth and final excerpt from “Bid Testing Best Practices”, a white paper from OptiMine Software. In this post, Jason looks at two specific applications of value-based bid testing using the same data. You can read earlier excerpts about position-based bid testing and current bid-based bid testing, or visit optimine.com to download the whitepaper.
The best approach is value-based bid testing: basing test bids on the present value per click and making small changes up or down to see how they impact campaign goals. This strategy takes time due to the need to test a small bid change, observe the results, and repeat the process until you find the bid that ideally matches your campaign goals. However, it is time well spent because it avoids wild swings in click volume and maintains control over the budget. How much of a nudge to give bids depends on how much risk can be absorbed at any given time, balanced against whether the incremental cost incurred is outweighed by the incremental gain.
The question of whether to test up or down depends on the campaign goal. If the goal is to maximize conversions, test bids should be incrementally increased and then evaluated against your goal. If the goal is to maximize efficiency, test downward to see if the same results can be obtained at a lower cost. Testing downward is an often overlooked but extremely important bid test strategy. For example, if a bid of $0.85 meets the goal on average as well as a bid of $1 per click and the lower bid is applied across thousands of keywords, the cost savings quickly become substantial.
Below are two interpretations of the same hypothetical data, illustrating various outcomes of changing bid levels incrementally based on your goals.
Goal 1: Maximizing Conversions
If the goal is maximizing conversions, for example, bids should be increased to raise the ad position. In this example, bid testing shows the higher the bid, the higher the conversions. And even though the ad already occupies a high position, incrementally testing the bid upward might result in additional modest gains in conversions. Something to note is that profit falls as bids are increased, which might be an acceptable trade-off, given the goal of maximizing conversions. This is bid testing in its simplest form, but there is far more to it than this.
Goal 2: Maximize Profit
If we change to goal to maximizing profit, the ideal bid changes. In this case, testing shows that bidding lower accomplishes the objective. Fewer conversions are generated than with higher bids, and we are in a lower average position – but the cost per conversion is lower, and consequently the profit is higher. This example shows that, while bidding upward to achieve a higher position generates the greatest number of conversions, it comes at the cost of reducing profitability.
The Bottom Line on Bid Testing
Internal changes to financial goals combined with the constant changes of a dynamic marketplace make bid testing necessary to keeping a paid-search program competitive and profitable. Choosing the proper bid testing approach is as important to paid-search success as the choice of keyword bid optimization method. Of the three methods explored above, only value-based testing maximizes performance improvement while minimizing financial risk. In contrast to its bid-testing cousins, the goal of valuebased is to find the maximum value of a keyword, regardless of current bid or position.
There are several compelling advantages to testing small incremental changes and testing frequently. Small changes minimize risk because the potential impact on budgets is small and controllable. Moreover, because they represent relatively small potential risk to budgets and/or performance, small changes can be tested with greater frequency. Frequency is an important component of bid testing because it delivers much greater long-term benefits than sporadic testing. Frequent testing is also important for companies in highly competitive environments and companies whose products are highly seasonal. It also allows you to more quickly and proactively identify marketplace changes rather than simply react to drops in PPC performance with dramatic and often expensive bid changes.
In determining what to test, the simple answer is that every aspect of a PPC campaign should be tested to make consistent improvements in performance. But if you’re not testing now, a good place to start is determining which aspect of your campaign has the potential for the greatest and quickest returns – either in terms of improving important performance metrics or increasing the effectiveness of your ad spend. Once you’ve tested and optimized this low-hanging fruit, create additional and perhaps more difficult goals and start testing again.
Implementing such a testing regime can seem like a daunting prospect for companies that manage tens of thousands or millions of keywords. Fortunately, there are applications that can help automate the testing process. However, any tool you choose should allow you to control the frequency with which tests occur and the acceptable range in which you are willing to allow bids to be adjusted – either in terms of a fixed dollar increment or in terms of a percentage. The best tools allow advertisers to spread out the testing over a long period of time to gather a variety of performance observations at different bid levels, all while protecting budgets and profit margins to the maximum extent possible.
@OptiMineInc
