Obviously, if you’ve got it, profit is the most important metric for most businesses (though businesses keeping a close eye on their cashflow will also be monitoring how much they’ve been spending to achieve this profit).

A lot of people spend a lot of time talking about ROI (return on investment, the amount of money that you make, expressed as a percentage of your spend). The problem here, particularly if you don’t pay an agency to manage your campaign, is that for a PPC campaign, the lower you appear, the better your ROI will be (if your conversion rate isn’t lower in lower positions – a reasonable assumption in general).

Here’s an example. Here are the results that you may get in the top 15 positions, for your campaign, with a conversion rate of 2%, an average order value of £50, and an assumption that all income is profit: 

The most profitable position with these numbers would be 6th, but the lower you go, the higher the ROI is. Why? Because clicks are cheaper in lower positions, but they are worth just as much, so you get more clicks (and hence greater return) for your money.

The question you need to ask here is whether you’d be happier spending £35 to make £465, or spending £1650 to make £1650. Is the additional £1615 spent worthwhile, if it generates £1185 in profit? Or would your money be better spent elsewhere?

Since the answer to this question isn’t going to be the same for every company, clearly neither profit nor ROI is sufficient to tell you what you should be bidding – you need to understand what an acceptable return on investment is, and what you could get for your spend elsewhere.

Of course, if cashflow isn’t a problem, why would you not want to maximise your profit? Particularly if you get your money back very quickly, as you would with an online store, for example.

As an agency, possibly the biggest challenge that we face is acting in our clients’ best interests, when we don’t have sufficient data. How do you answer the above question if you don’t know what percentage of the sales value contributes to profit? In the above example, it may be that for every £50 they receive, they have to pay £40 to manufacture and distribute the goods. Without knowing this, you can’t really think about profit…

So how do you do it? The method I se most of the time is to optimise a value, subject to an absolute limit. For example, minimise the cost per conversion, whilst spending £x per month, or maximise the number of conversions, at a cost per conversion of £y. Most clients will have some idea what the approximate value of a conversion is (even if they don’t share it with you), and by talking to them, you can tailor an objective to their circumstances.

It may be that you’ve never really thought about these things – but without a clearly defined KPI and objective, it’s impossible to optimise the account – how will you even know if the performance is getting better or worse? Agreeing a quantifiable objective with your client (or, if you’re managing your own account, choosing an objective that makes sense to your business) is critical.

But it’s not always quite as straightforward as it sounds. For example, we have a client who wants us to generate business for them. But all we can track is leads – and it’s quite possible that some of the keywords generate leads, but the leads are worthless to them. We managed to track this after some work, but in general, in order to use a metric, you need to be able to track it at Adgroup level (at the very least, and ideally at Keyword level). So it has to be something that either Adwords or your Analytics package report.

I mentioned at the beginning that one of our campaigns is managed based on the Cost:Demand ratio (demand is the total sales value, before out-of-stocks and rejected orders are removed). The reason for this is that they wanted us to optimise profit, but didn’t want to give us commercially-sensitive profit margin information.

If the Cost:Demand ratio is lower than the gross profit margin on sales, then the company must make money on the campaign. Our objective here was to minimise the Cost:Demand ratio, subject to spending a fixed amount. This guarantees that the demand is maximised, and hence the contribution to profit is maximised (assuming that all products have the same margin – an assumption our client was happy with).

So why didn’t we just use Demand?

Consider the following example for an Electicals retailer. They are happy with their overall Cost:Demand Ratio… 

You were supposed to spend £750 over this period, so you need to push up the bids somewhere. Which Adgroup should you push up? Toasters generated the most demand, so perhaps you should push the spend into this Adgroup? But the question is which Adgroup the additional spend would most benefit – where do you get the most ‘bang for your buck’. In this case, Toasters is generating the most demand, but you’re having to spend a lot of money to get this demand.

Add in the Cost:Demand ratio, and it becomes simple… 

The additional spend would generate the most additional revenue in the Microwaves Adgroup.

There is one further point on this – whenever your objective is a ratio involving, such as cost per click, cost per conversion or cost:demand, you need to subject your account to an absolute limit, generally a minimum spend.

The reason for this is that you can always improve these statistics by reducing your bids. If you cut your bids, clearly your cost per click will fall. But if the conversion rate remains the same, the cost per conversion will also fall. And if your average order value doesn’t change, your cost:demand ratio will also fall. And if your margin doesn’t change, your ROI will always rise as your bids fall – as we saw earlier.
Which objective is right for you, then? What should you be looking to optimise (and hence reporting on)? The one that gives you the best indicator of profit is generally the best, as long as you can track it at a sufficiently granular level, so that you can use it to adjust your bids. If you’ve got the information, then profit is the answer.

If you need a minimum ROI, then calculate the ROI for different levels of spend, and compare them to other advertising media, and determine your budget based on the level of spend that gives you the right ROI. Just don’t try to ‘optimise’ your ROI, optimise your profit, for the given level of spend.

If you don’t have profit margins, then Cost:Demand ratio is almost as good. If the margins are similar on your entire product range, the two are equally effective.

If you don’t have conversion values, then the best you can do is to maximise the number of conversions for your spend (i.e. minimise the cost per conversion for a given level of spend), or if your client gives you a target CPA, maximise the conversions, at that CPA.

There are occasions where you can’t track conversions – maybe your checkout process is on an external website. Here, you can either place conversion tracking on the last page before the user leaves your site. Only if you’ve got no way of tracking conversions at all, should you look at CPC. It’s very easy to get clicks cheaply, but how can you tell which clicks are worthwhile, and which aren’t?

As an experienced website optimisation specialist, I want to highlight what I feel are the advantages and disadvantages of such software:
Advantages

• This technology is unrivalled in terms of providing data of attractive elements of a website.  It can be ascertained exactly which areas of your website are being seen and which areas are not.  This data then allows you, with changes to the website, to ensure visitors are seeing the products/messages you wish them to see.

• You can run more effective website optimisation tests by concentrating your efforts in the areas which are seen more often by visitors.

• Taking note of areas which are rarely noticed, you can remove or change the content in these areas to improve the overall effectiveness of your website.

Disadvantages

• This technology is very expensive.  Now, to achieve reliable results, you would need to run in the region of 20 tests.  Typically this would cost in the region of £8k - £10k.  Running fewer tests than this would only highlight the most obvious of patterns, which could easily be obtained with cheaper, less sophisticated technology.

• Each test case is clearly aware that they are being tracked.  Under test conditions it is well known that a user will behave differently than they would in their own privacy.  This makes the data less reliable than other software such as click tracking, which is recorded without the user’s knowledge.

• The data only tells you where the user looked – it does not tell you why.  Often, when setting up website optimisation tests, it is more important to understand why visitors behave the way they do.

Conclusion
In Summary, I believe that with unlimited resource, Eye-Tracking is an excellent tool in the arsenal of a website optimisation specialist.  However, looking at the current costs, compared with how much improvement can be made to a website as a result of this technology – I would suggest it is not worth using.  There are many other, very effective tools that are much cheaper and would provide data of almost as much value.

For further reading I recommend http://websitetips.com/articles/usability/eyetracking/

Having recently made the transition from client to my first agency role, it’s clear that both have their own mutual benefits. Ultimately it comes down to personal preference.

In my previous role, the client’s industry was all things power tools, hand tools and fixings. By the end of my time there, I knew all there was to know about power tools – a saw to you and me is just a saw, but to a builder it can be a hacksaw, a mitre-saw, a cut-off saw, a ripsaw…. (I could go on!). But that’s the key in any client-side role – expertise in your field and knowing every little detail about your customer’s needs.

When it comes to constructing a PPC campaign, you have the advantage of using this wealth of knowledge to hunt out the long-tail, where an agency has to start from scratch, building and developing their keyword list over a period of time.

Reporting directly to the MD of the company is also a major plus. Feel like you need a higher budget? No problem. Put your argument together and take it straight to the top.

So why move agency side?

For me, PPC was the most interesting part of my previous role, but also one of the smallest areas in terms of time I was able to devote. In any client-side e-commerce role, it’s quite rare to find someone employed solely to look after the company’s PPC (unless we’re talking huge multinationals). For me, there were many aspects to the job; sales, customer service, marketing, analysis and content management amongst many others. You feel as though you are constantly fighting a losing battle to try and commit valuable time into an Adwords campaign (and this often has to be made up outside of working hours!). Inevitably, in this type of ‘rushed’ environment, you are limited on how responsive you can be to changing conditions.

Making the move over to an agency is like entering a whole new world of PPC. Being able to devote the majority of my time into the PPC campaigns makes an incredible difference, the obvious initial reason being that the increased working hours put into campaigns are always going to offer a more in-depth approach. Keyword lists can be expanded and assessed, new adverts tested on a regular basis, competitor activity reviewed consistently and more time can be spent analysing reports. I have found as a side-benefit, and one that probably can’t be taught, that spending so much time on the PPC campaigns now, I find it much easier to identify patterns and hence to detect potential problems before they turn into serious ones.

I suddenly have diversity, and it feels great! One minute I’m working on a campaign for men’s formal shirts, the next it’s concrete garages, and then estate agents in Central London. Each campaign has a completely different market to understand, with different customers to target. Variety really is the spice of life.

But the best part about working in an agency now is that I’m now surrounded by people who live and breathe PPC (we’re an exciting bunch – promise!). This industry is all about knowledge and experience, which is something an agency can offer in abundance.

In my client side role, my knowledge of PPC was primarily self-taught, and my development was in my own hands. In an agency, my development is paved out for me, and I am surrounded by experts that are happy to pass on their wealth of knowledge (I can see their heads getting bigger as they read this!). If Google decide the change the rules overnight, you can guarantee I’ll know about it straight away. Previously, I always felt like I was playing catch-up.

So is client-side or agency best? For you, I can’t tell you the answer - there are pros and cons to both sides, and only you can decide which suits you best. But as for me, I feel like in 6 weeks, I’ve learned more than I could in 6 years in my previous role, and that tells its own story.

 
SEO

A new website, in a competitive industry, is going to find it difficult to get rankings on high-traffic keywords quickly. Even with an established website, it’s unlikely that you are going to rank highly on every term that you would like to.

Consider Next, for example. They have a decent range of garden furniture, but don’t rank on the first two pages naturally for the keyword ‘garden furniture’.

It can take a long time for SEO to show any kind of return on investment, and the nature of the business is that it’s quite opaque – whilst you can see the overall impact of the work that you’ve done, you can’t see exactly what caused your rankings to improve.

And you’ll probably have to do quite a lot of work redesigning your website in order to optimise your search results, which requires additional cost and resource.

But SEO has clear advantages, as well. Once you get a high position for a keyword, you can get a lot of traffic very cheaply, and even if you stop spending completely for a short time, you may well retain your positions.

Typically, SEO results pick up most of the clicks, though the exact percentage varies dramatically, depending on which study you read.

There is also a ‘halo-effect’ with SEO. As well as getting rankings for the keywords that you are targeting, you will also get rankings for searches so long and obscure that no PPC advert would ever appear. A commonly-quoted statistic is that 50% of all searches on Google are unique. Trying to chase these with PPC would be impossible even using Broad Match, but with SEO, you raise the profile of the whole website in the eyes of the search engines.

 
PPC

There are three clear advantages to PPC. You can get instant results for any keyword that you want to appear for, you can control your message very easily and you can see exactly what you are getting for your money.

On the other hand, with the exceptions of the savings that you’ll get by improving your Quality Score, the cost of PPC is unlikely to improve dramatically over time. You can improve your adverts, and adjusts your bids in order to get as many sales or leads as possible at an acceptable cost, but after a while, improvements will become harder and harder to achieve.

Next appear top for ‘garden furniture’ in the PPC results, a position that they can maintain thanks to having a good range of products, reasonably priced, a recognised brand name and deep pockets.

Perhaps the biggest problem with PPC is that you need to list all of the keywords that you want to appear for. Using Phrase or Broad Matching to expand your keyword list can help here, but you are likely to appear for keywords that aren’t relevant.

This is, of course, true with SEO as well, but with SEO, you aren’t paying per click, so it doesn’t really matter if you appear for things that aren’t that relevant.

 
The Answer

The answer to the question is that both PPC and SEO offer clear and distinct advantages to advertisers. Perhaps the question, then, is how best to get the most out of the two, and use them to complement each other, rather than cannibalising each other.

By looking at your PPC results, you can see exactly how much traffic is available on keywords, and how well that traffic is likely to convert. Since you can only target a limited number of keywords for SEO, this can give you a clear guide of where your efforts would best be targeted.

Also, PPC allows you to experiment with different advertising messages. If you have a number of different USP’s, for example, you can test them using Adwords (serving each up 50% of the time, and seeing which generate clicks and conversions), and then transfer your results into your natural search results.

There is clearly an advantage to appearing twice on the search results as well. It’s not surprising that somebody is more likely to visit your website if you have two adverts rather than just one, and a lot of searchers probably won’t even realise that they are for the same company, particularly if your messages are different.

Whether or not you should use PPC, SEO, or a combination of both, really is a decision for every business to make for themselves. But the natural synergy between the two is sufficient that for the vast majority of businesses, it is certainly worth doing both, if marketing budgets allow.

Steve Baker & Guy Mains

They go on to explain that according to a comscore study, “results … across core search engines shows that as many as 30 percent of searches are abandoned without a satisfactory result”, and that “approximately two-thirds of the remaining searches required a refinement or requery on the search results page”.

So, they want to give you results that tell you what you want to know, or help you make a decision, without having to run further searches.

They’ve just released their first TV advert (adage.com/digital/article?article_id=137044), to back up this message, citing ‘information overload’ as the big problem, not just with the internet, but with the whole world (I think they even blame Google for the recession!).

This sounds great, I thought. I can barely wait to try it out! My excitement increased further when I read this article on ChannelWeb (www.crn.com/software/217700773). It lists five reasons that Bing could rival Google.

1) Visual Presentation. It apparently gives “a richer, more visually agreeable search presentation”

2) Keywords Help. “As search words are being typed into Bing, the Bing search function offers keywords to help users narrow their searches”. They do acknowledge that this is a function already offered by Google, but are hopeful that Microsoft’s version will be better.

3) Shop-Til-You-Droppers and Hypochondriacs.  It appears that Bing will break the search results down into four types, shopping, local, travel and health. Though this hasn’t happened yet, as far as I can see…

4) Best  Match, Instant Answers And Quick Preview. Best Match, they say, is the Bing equivalent of Google’s ‘I feel lucky’ button.  Instant answers gives a single-click version of this, and quick preview gives you a preview of each result’s content without clicking on it.

5) It’s Microsoft. They claim that Microsoft are so big and ‘savvy’ that if they really try, they can probably beat anybody at anything.
Hmm…

Let’s look at the visual presentation first. Here are the search results for ‘toasters’ from Bing and Google…
 

The results look pretty similar to me, though Bing isn’t using the full width of my screen, and they put their alternative searches on the left, rather than at the bottom of the page.

What about the search suggestions? When I typed toasters into Bing, it came up with two:
 

 
Hmm. Wasn’t really looking to buy a toaster for my kids, or join a club for toaster fans… What does Google come up with?
 

Quite a difference – it suggests looking for the best toasters, reviews, toaster and kettle sets, 4-slice toasters and a few shops that sell toasters. They also give some indication as to how many results I’m likely to get. I think Microsoft have a long way to go before keyword suggestions become one of their selling points…

At the moment, the splitting of the search results into four categories doesn’t appear to be working.

Clicking on the shopping option above the search results takes you to Ciao – hardly a search revolution. And the other options aren’t visible anywhere…

The same appears to be true for Best Match and Instant Answers – if these features are on the website, then they aren’t being promoted very well. I suspect that this is something they’ve still got to add?

The quick preview is shown on the top screenshot, and is quite good, though in the case of toasters, the content of the website is quite predictable. Most of the websites sell toasters, and the quick preview is likely to show you this. Though, as you can see above, toasters.com does not actually sell toasters, so this could potentially save you a fruitless (and indeed toastless) click.

The last point makes no sense to me at all, that it will do well because it’s Microsoft. After all, so was Live Search.

So what’s the conclusion, then? Will Bing suddenly change the search engine world? If they are still in the process of rolling out of their functionality, then they’ll certainly win over some new users. But for me, this is more evolutionary than revolutionary. Bing is better than Live Search in my opinion, with some nice new features, but for me, the most critical challenge is the search results themselves.

If Bing delivers more relevant results than Google then it has a chance of eroding Google’s market share, but I believe that users will need a strong reason to switch. It may be true that Google’s users are one bad experience away from switching search engine, but the user experience on Google is consistent and reliable.

Unless Google drop the ball badly, it’s probably going to take a bigger USP than any I’ve seen so far from Bing to threaten Google’s domination in the search market.

Currently, I speak to about half my clients on a weekly basis, be it over the telephone or via email.  I’ve found myself chatting about going out at the weekend, being a regular golfer and I even have a £5 side bet with a client that my advert will beat his!

There are indeed benefits to these chin-wags:

•    I understand the clients’ business better (better adverts and keywords)
•    I understand what is important to the client (better reporting)
•    The client understands PPC better (more confidence in the service)
•    The client offers ideas (better keywords and adverts)

Everyone is happy!

And when they’re not happy…  I can be honest and say things aren’t going well.  Instead of getting upset, angry or finding a new PPC agency – my client asks “What should we do, Chris?”

Now my client is listening to me.  How many times have you thought ‘I wish people would listen, I know what I’m talking about’? Well, now’s your chance.

As a result of such situations, I’ve been able to persuade my clients to make changes to their websites, invest in website optimisation and try some more radical adverts.

Inevitably, being given the freedom to test bears fruit, and the PPC manager/client relationship grows stronger!

But Google is a search engine – and in the long run, they live and die by delivering relevant results. If you search on Google for a product or service, but don’t find what you’re looking for, you’ll probably end up using Yahoo or MSN…
The Quality Score is intended to be a measure of relevance, and to a certain point, it is. It’s based on the clickthrough rate, and also looks at whether the search query is contained in the advert, and on your website.
If people click on an advert, it’s likely to be relevant – in the absence of artificial intelligence, Google are using ‘real’ intelligence to judge the relevance of the adverts. And if the advert mentions what somebody is searching for (without dynamically inserting the keyword), then the advertiser must have written an advert specifically for that search query – so it’s likely to be relevant (unless they are e-bay).
So how well does the Quality Score work? Look at the Quality Score from the perspective of each of the interested parties, Google, the searcher and the advertiser.

Google

For Google, it’s clearly great. The way to maximise the number of clicks that they get on paid adverts is to put the most clicked-on advert at the top, followed by the second most clicked-on advert and so on. Of course, in order to maximise the revenue from clicks, they want the adverts with the highest bids at the top, so by multiplying the two factors together, they get the best of both worlds – lots of clicks, with a high cost-per-click.

But they also get adverts that people click on at the top – which improves the relevancy of their search results. Without the Quality Score, the adverts at the top of the search results will be ones with the highest bids – regardless of whether they were advertising what the user was searching for. The result would be fewer clicks, and disappointed users.

The Searcher

If you go onto Google searching for a toaster, do you really care why the adverts that you see are there? Does it matter whether they paid to appear there, or simply have an old website with lots of links to it? What matters is that the advert links to a website that sells lots of toasters.

Since the PPC adverts have to bid a lot to appear high in the search results, and need to convert their clicks to sales in order to make money, PPC adverts should be of high quality – an e-tailer with just one or two toasters is unlikely to appear high in the search results for long, as they simply won’t convert clicks into sales.

So what effect does the Quality Score have on this? The first thing it’ll do will be to weed out adverts that can afford to bid high because nobody clicks on them (so it doesn’t cost them much). This can only be a good thing for the user-experience. What about other benefits? Well, it’s likely that household names will get a higher clickthrough rate than other adverts, as they have a level of trust. Part of the Quality Score is based on the landing page. So websites that are covered in spammy adverts, lack things such as a privacy policy or contact details, or don’t relate to what was being searched for, get severely penalised. Which has to be good for the user.

The Advertiser

This one’s perhaps the most controversial. Clearly, Google are happy or they wouldn’t be doing it. And the users approve, or Google wouldn’t have the market share that it does.

The fact is that the Quality Score makes life much more difficult for the advertiser. When writing adverts, there are now three things to consider – the effect on the conversion rate, the effect on the clickthrough rate, and the effect on the Quality Score.

You don’t want people to click on your advert if they aren’t likely to buy, but you do want anyone who is likely to buy to click on your advert. But the Quality Score complicates things further, by rewarding you for including the search query in your advert, ideally in the title. What do you do if all the other adverts are doing the same? Clearly, your advert won’t stand out if you include the search query, but if you don’t, you’ll get penalised on the Quality Score.

And to improve your Quality Score, you need a high clickthrough rate – but you only want to attract people who are likely to buy, or you are wasting money.

Yet, here I am, an advertiser, saying how great the Quality Score is. Why?

Firstly, I know that as long as I only advertise on relevant keywords, I’m likely to competing with other companies selling the same sorts of products or services (plus e-bay).

Secondly, not understanding the Quality Score can cripple your account. Conversely therefore, understanding the Quality Score can only make things easier for you. And it’s not as though the Quality Score is some kind of Google or Agency secret – the information’s out there, freely available to anyone who bothers to look it up.

The Quality Score rewards you for actively managing your account, testing adverts and keywords, adjusting your bids etc. This gives you a big advantage over somebody who just sets up an account, and leaves it for months or even years at a time.

So does it penalise small advertisers? Do you need an agency to stand a chance of making money using Adwords now? It’s certainly true that in order to do a good job, it takes a certain amount of time – particularly in the early stages, where you have to read up and understand how to set up and manage an Adwords account. Small companies should ask whether they can spend the time required to manage the account effectively, but if they are willing to set aside a few days initially, and an hour or two per week, they should be able to do an adequate job of managing an Adwords account.

Overall, I like the idea that you can improve the performance of your account by actively managing it, and definitely think this is a good thing for advertisers. Since Google have revealed most of the processes behind their algorithms, there aren’t really that many industry ‘secrets’ that give agencies an unfair advantage over other advertisers.

Don’t get me wrong here – agencies have huge amounts of experience in managing campaigns, generating keyword lists and writing adverts, so there are clear advantages to using an agency – but small businesses can manage their own accounts on a (roughly) level playing field.

Assumptions

There are a number of implicit assumptions with the Quality Score that don’t necessarily hold true.

The first is that clickthrough rate is an indicator of relevance. It’s an indicator of the relevance of the advert to the search, not the website. Whilst the landing page is a small part of the algorithm, an advert can generate clicks by being misleading, or simply well-written. The fact that you are better than somebody else at writing adverts doesn’t necessarily mean that your website is more relevant than theirs. But then, the quality of an advert affects its performance across all advertising media, so it’s not really an issue.

The second is that putting the search query into the advert is an indicator of relevance. Firstly, it’s a better indicator of a well-structured account (since every keyword in an Adgroup shows the same advert, dynamic keyword insertion notwithstanding). But if you are a plumber in Birmingham, should you really have to make the title of your advert ‘plumber in Birmingham’, just because that’s what people are searching for?

The Quality Score isn’t perfect, and until Google can understand better what the user is looking for, and what your website is all about, it never will be. But Google know this – just this month, in the Google ‘Founders Letter’(http://googleblog.blogspot.com/2009/05/2008-founders-letter.html), Sergey Brin stated:

“Perfect search requires human-level artificial intelligence, which many of us believe is still quite distant. However, I think it will soon be possible to have a search engine that “understands” more of the queries and documents than we do today.”

As artificial intelligence becomes more adept at measuring how relevant a website is to the searcher’s requirements, so it’s likely to become a larger part of the Quality Score. This will, in turn, make ‘tricks of the trade’ less and less of an issue.

Google are also doing other things to ensure that the user sees all of the relevant adverts – offering spelling corrections, alternative searches, and predicting what you are searching for being just three ways to try to kill off the ‘long tail’.

The Quality Score may not be perfect, but I believe that a world with Quality Scores in it has to be an improvement.

So what should you bid? Whether you bid £2.01 or £2.99 will make no difference – your advert will still be 4th, and you’ll only spend under half of your budget. Pushing the bid up from £2.99 to £3.00 will result in your budget running out part-way through the day.
So what should you do? Scheduling your advert to run only at certain times of the day certainly isn’t the optimal answer (unless you have conversion data indicating that this is the way to go).
Arbitrarily bidding £3 for part of the day and £2 for the rest makes no sense in terms of your sweet spot – if the conversion rate is the same in both positions, then there should be a single sweet-spot.
But this would give you more clicks for your budget. Suppose in the above example that you bid £3 for the first half of the impressions, then dropped it to £2. From the first 500 impressions, you’d get 25 clicks, at a cost of £75. From the second 500 impressions, you’d get 12.5 clicks, for £25. So you’d spend the full budget, and get 37.5 clicks – more than you could get any other way…
So that’s the answer then.
But wait a minute (I hear you cry)! Surely the profit from appearing in 3rd 50% of the time and 4th 50% of the time must be lower than the profit of the most profitable position (3rd or 4th)?

If you didn’t have a budget, then the above strategy could never be the most profitable one – either appearing 3rd all of the time or 4th all of the time would be more profitable.
Suppose for example that the conversion rate above was 5%, with conversions worth £100 each. The profitability of each position – if you had no budget restriction – would look like this:

So the most profitable position would be 3rd. Appearing 3rd 50% of the time and 4th 50% of the time would make you only £87.50, so you wouldn’t want to do it.
But if you have a restricted budget of £100, you can still make £87.50 by appearing in both positions – but appearing in 3rd all of the time would only make you £67 in profit before you ran out of money.
In general, if 3rd position is more profitable than 4th, but would run out of budget, you will make more profit by ensuring that you spend the full budget, just as the day ends.
In this case, appearing in 3rd half of the time and 4th half of the time will spend the full budget. Appearing 4th more of the time will spend less than the full budget, and appearing 3rd more of the time will run out of money. Since 3rd position would be more profitable that 4th given unlimited budget, you should appear in 3rd as often as possible, without running out of budget (in this case, 50% of the time).
In practice, this is quite a fiddly thing to do. You may be better to take advantage of varying traffic volumes on different days of the week. If you can spend £150 on a Monday, and only £50 on a Sunday, then run different campaigns on different days with different budgets. But if this doesn’t get you around this problem, then you may want to consider the above solution…
This is a theoretical situation, of course. If you have a number of keywords, or your keywords appear in different positions in different locations, or at different times of the day, then small adjustments to the bids will affect the amount that you spend. In the main part, this is just something to bear in mind if you find that your spend fluctuates wildly, with no obvious reason. Check the position on the keywords that generate the most traffic, and see if the position is the root cause of the problem.

It appears that the percentage of clicks going on Paid Search is falling, which is potentially a misleading statistic (see my blog on Google and the 80:20 ratio). But they make another, very interesting point.  They indicate that the biggest fall is on brand-name keywords, and quote Andy Beal at Marketing Pilgrim, who says:
“Is that likely due to a reduction in spend, or Orbitz et al figuring out that they really don’t need to spend so much on paid advertising–considering they’re #1 in the organic results?”

Leaving aside the fact that, in the UK at least, Orbitz are still brand-bidding, this is quite an interesting trend, if true.

The question of whether to bid on your brand name or not has been the subject of many blogs in the industry over the years, but most people are in agreement that you should certainly at least consider bidding on your name.

Back in 2006, Scott Woodard (also at Marketing Pilgrim) recommended bidding on alternative spellings and  mis-spellings of your name, and even slogans: http://www.marketingpilgrim.com/2006/12/9-cost-effective-ppc-branding-strategies.html

But the obvious argument that you get from clients is that if they are appearing top for their brand name, and people are looking for them by name, they were going to get the traffic anyway. There is certainly some truth in this, as a large percentage of the clicks on the PPC advert would cannibalise the natural clicks you were going to get anyway. So why bother?

Ian Lurie at Conversation Marketing, and Dave Davis at Redfly Marketing both make good arguments in favour of brand bidding: http://www.conversationmarketing.com/2008/03/defend_yourself_bid_on_your_br.htm
http://www.redflymarketing.com/blog/5-reasons-you-should-be-bidding-on-your-company-name/
To summarise, these are the critical benefits:
1) The traffic’s cheap. You’ll get a big advantage on your Quality Score, and your clickthrough rate will be high (giving you another QS boost). So in most cases, you’ll only have to pay pence to appear for your brand name. And this spend will often represent only a very small percentage of your advertising spend.
2) Other people can bid on your brand name. There are no rules against it anymore, and if you don’t bid on your brand name, there’s a decent chance that one of your competitors will appear at the top of the search results when somebody is looking for you. It’s like driving past Sainsburys and Asda to get to Tesco – it’s inevitable that you’ll lose some customers, it’s just a question of how many…
3) Natural Search results are in a constant state of flux. It’s quite possible that your website won’t be top for your brand name all of the time, particularly if it’s quite a common name, or consists of an English phrase. This is particularly an issue if you’re a relatively small company, and your website doesn’t have much age or a lot of links to it.
4) Controlling Your Message. You can control exactly what people see when they search for you. You can show your latest promotion, and perhaps more importantly, land them on a page of your choice.
5) You may not rank that well for misspellings of your name. Not everyone knows how to spell your brand name. We used to have an account for somebody who sold Wedgwood products, but I found that more people spelled it Wedgewood than were getting the name right.

From this, it sounds like a no-brainer. But it may not be quite that straightforward. There are a number of questions you should ask before making a decision.
1) What’s it going to cost? We’ve got a client who pays nearly £3 per click to bid on their brand name, despite getting clickthrough rates of 20% - 40%. The reason for this, aside from the high value of the traffic, is the fact that their name is also a common phrase that people search for.
2) Is anyone else bidding on your brand name? If you are a new website, or a relatively small player in the market, there’s a good chance that they aren’t. In which case, if you are top of the search results, you’ll lose very little traffic, if any.

Whether you decide to bid on your name or not, you’ll certainly want to make sure that your affiliates aren’t allowed to bid on your brand. This is a fairly standard clause in affiliate contracts, but there are plenty of unscrupulous affiliates out there who will ‘accidentally’ bid on your brand…

To come back to the original point, it appears that more and more advertisers are stopping their brand-bidding. Why is this?

A few possibilities spring to mind. Firstly, it’s possible that businesses are dropping their PPC campaigns completely. This would certainly fit with the other results in the E-Consultancy report, but it doesn’t really tally with results that I’ve been seeing recently. With a few exceptions, competition appears as high as ever during this recession.

In the past, businesses have often cut their marketing budgets when times were hard – something that has always made little sense to business analysts. Based entirely on my experiences, it appears that this just doesn’t seem to be true this time around.

Another possibility is the effect of competitor brand bidding on your Quality Score. If you’re a small advertiser, bidding on keywords with very high traffic volumes, and very low clickthrough rates, can have a very serious impact on your Account Quality Score, undermining every other keyword in your campaign, for very little reward. On many of my accounts, I’ve removed competitor names, in order to improve the overall account quality.

If this is a common conclusion, and fewer people are bidding on competitor terms, perhaps the argument for defensive bidding is lessened. But I doubt that this is that commonplace – there are very few people out there worrying about their Account Quality Score, perhaps because Google don’t seem to like talking about it…

So, should you bid on your brand name?

On this, I tend to agree with Anil Batra: http://webanalysis.blogspot.com/2008/01/should-you-be-paying-for-clicks-on-your_15.html. Testing is critical if the spend on your brand name is going to be a significant amount of money. Work out how much traffic your brand name drives from natural search only, then add PPC and see to what extent it increases, and at what cost.

This is really the only way to be certain, but if you do decide to bid on your brand name, there is one thing you must do – split it out from the rest of the campaign, at least in the reporting. Typically, the performance of your brand name will be much better than other keywords, and combining them to analyse the performance of your account will make the performance look better than it really is.

For example, suppose that your breakeven cost per conversion is £20. You get a report from your Agency reporting 100 conversions at £15 each (total spend £1500). You’ve made £500, so you’re happy.

But you ask them to break out the brand name, and they show you that your brand name generated 50 conversions at a cost of £2 each, and the other keywords generated 50 conversions at £28 each.

Suddenly things aren’t looking so good. You’re clearly losing money on the rest of your account, but it’s being disguised if the data isn’t being separated out. A good agency will generally break your performance down into Adgroups and Campaigns in your reports, but there are a few out there who don’t…

In summary, I’d say that bidding on your brand name is almost always a good idea, so if you aren’t, I’d definitely test it.

1.     Those With Minimal Monthly Spend

As an agency, we often appraise PPC campaigns for companies who seemingly spend enough to justify our management fee.  When appraising these accounts though, it’s not uncommon to find that they are haemorrhaging money on bad keywords, terrible bid strategy and poor advert grouping.

By applying our expertise we can stop the campaign wasting money, but then the monthly spend is so little that our management fee looks monstrous in comparison.

The usual practice is to take on the campaign for one month, fix the major issues, and hand back the campaign in a position where it can run itself fairly well (at least for a little while).  After that, we can do the occasional 1 month management, in which time we will re-evaluate the bidding, test new keywords and adverts etc, so that the campaign is running efficiently again.

2.    Those Experienced In PPC

Some clients come to us with a very good understanding of PPC.  This is not a bad thing, but often if they have little experience to go with the knowledge, it can cause problems.  Some of these clients will try to “help” by making changes to the account themselves, which can cause serious problems.  Others will try to analyse the campaign each day - asking why sales have fallen one day compared to the last.  The main problem is that they don’t trust you to do as good a job as they could and don’t believe you will care about the campaign doing well.

From the beginning, a clear communication channel should be established, with the client feeling comfortable to raise any questions and confident that you will respond quickly.  This is the best way to quickly build trust and afford the time necessary to start delivering results.

3.    The Overly Enthusiastic

Another type of client is those who get very excited about the possibilities a PPC Campaign is going to bring to their business.  Usually they’ve never done PPC before, or have never got involved.  Now, all of a sudden, they want everyone in the world to see every product on their website.  At the same time they want the site to be redeveloped and website optimiser on every page!  That’s an extreme example, but the point is there has to be a gradual building process.

It’s best to outline a plan of action and time scales.  Even if you are unsure exactly how long things will take, produce a preliminary plan of action, such as:

Week 1 - Build campaign for products 1-10.  Target UK
Week 2 - Introduce products 11-20
Weeks 3-5 Advert Testing, bid optimisation, keyword research…
Week 6 - Target US
Week 8 - Begin website optimiser on home page
Etc…

At least this way the client will understand how the process will work and not be complaining that the advert is not appearing in Australia after day 2.

It’s important to remember that every client just wants their business to do well, and many of them are unfamiliar with, or sceptical about the wonders of PPC.  Just keep the communication levels high, be honest and open about what is achievable and how quickly and everything should be dandy!