Calculating the best bid for your PPC keywords

In search engine advertising, you bid for a position among the advertisements shown for a search. Sometimes, it may be quite difficult to calculate the optimum bid for a keyword. In this article we’ll look at some of the basic rules you need to follow when you set the bids for your various campaigns, ad groups and individual keywords.

To become successful with paid advertising, you have to know where each lead is coming from. All advertisers need a tracking system that at least reports revenues coming from pay-per-click advertising. If you can track PPC revenues down to campaigns, ad groups or individual keywords, it’s even better. Your tracking setup needs to be fairly exact – 90% accuracy may be OK, but 60% is not.

The upper and lower bounds for a bid

Once you have these figures, the upper bound for any per-click advertising bid is the revenue divided by the number of clicks:

max bid = revenue / clicks

If you count only the clicks from a particular ad group or keyword, you must be sure that the revenue figure you are using is applicable, i.e. that is only includes revenue created by that specific advertising.

This is the obvious breakeven point. You normally never want to bid this high. There are a few exceptions to the rule – if you can win a trip for two to Florida in a sales contest by just breaking even on the advertising, fine. But normally you lose money bidding above this upper bound.

There are a few ways to increase your upper limit, e.g by increasing the conversion rate. If you enhance the landing page so that it converts better, you will increase the revenue per click, which will enable you to bid higher.

There is also a lower bound for your bid, and that’s when you don’t get any clicks worth counting. Reducing your bid below that point won’t make much difference. In general, this drop-off in traffic happens when your average position in the search results is around 10 or worse, pushing your ad off page 1 of the search results.

Increasing the profits without taking chances

Once we know the upper and lower bounds for our bid, where do we make the most money? This is the tricky part, as any search engine advertiser will tell you. There is always a “sweet spot” somewhere between the bounds, where you get the highest profit, calculated as:

profit = revenue – advertising costs

It may seem silly to include such a basic metric here, but with PPC advertising a lot of things can happen as you manipulate your bids:

• A higher bid gives you a higher position among the advertisements competing for space on a search results page. A higher position may give you an exponential increase in the number of visitors. According to a 2004 report from the Atlas Institute, the #1 advertisement can get you 66% more visitors than the #2 ad – it has an inherently higher click-through ratio, and it is also shown more often. The #2 position in turn can get you 25% more visitors than the #3 spot.
• If your advertising budget is limited, you may not be able to pay for all the clicks you can get. In most cases it’s better to lower the monthly cost by lowering the bids than by capping your expenses solely with the budget setting. Assuming that every visitor is worth the same, regardless of in what position they found your ad, lower bids get you more visitors for your money. When you have the opportunity to increase your advertising budget, set the budget cap to your actual financial limit before you start increasing your bids.
• Unfortunately, there are good and bad visitors. You will find that a lot of people click on the top ad without really reading it, usually because they didn’t find what they were looking for among the natural search results. If you promote tickets to Paris, Texas by bidding on the search term “paris”, you will get an enormous amount of clicks from people wanting to travel to Paris, France – even if your ad screams “PARIS TEXAS IN THE UNITED STATES”.
• The higher you bid, the higher your chances are of becoming subject to click fraud. The major sources of click fraud are competitors trying to deplete your advertising funds, and owners of content network sites that click on your ads to increase their revenue from advertising.

In some situations, the sweet spot with the perfect bid can be very narrow. Bid too little, and you lose much of the potential revenue. Bid too much, and you waste a lot of money on empty clicks.

Starting a new campaign with the right bids

There is no simple algorithmic way to find the sweet spot, so simple trial-and-error will have to do. When you start advertising for a particular product or service, there are often no statistics to base your initial bid on. Start low and increase your bids until you get to a reasonable level of traffic.

You need to constantly monitor your campaign for “runaway” keywords, i.e. keywords that get a lot of worthless clicks that don't convert.

After you’ve had your advertisements running for a month or two, you can begin optimizing your bids. We recommend that you do this once for each of the major search terms that have enough volume, and once for the rest of each ad group.

The trick is to increase your bid until the profits stop growing. You usually know rather quickly if you’ve raised the bid above the sweet spot, since you will see an increase in traffic without a corresponding increase in profits – or possibly even a temporary loss. This is the time to hit the brakes, and reduce the bid to the last known, most profitable level for each major search term.

Optimizing the profit per click does not optimize your monthly profits, and is generally a meaningless activity. Do the math: it’s more profitable to get 2,000 clicks with a profit of $0.31/click, than to get 1,000 clicks with a profit of $0.60/click. The increase in volume that comes with a higher bid often compensates for the decrease in margin.

Naturally, this is true only up to a point. Finding that precious point where profits are at their peak is your challenge, and doing this regularly will increase the profitability of your online business. It’s really worth the effort.