Optimising Your Google Adwords Bids

You might have been expecting this to be the first section, but the simple truth is that the amount that you bid is very dependent on your conversion rate, and is strongly influenced by your click through rate.

Perhaps surprisingly, it isn’t influenced in any way by what your competitors are bidding. And the Quality Score is only indirectly relevant.

So what is the best position to put your advert in, and how do you calculate it?

Ask most people what the answer to this question is, and they’ll reel off an answer like œfourth or œsecond, but I think it’s fairly clear that the question is much more complex than that , after all, fourth place is going to be quite expensive on competitive terms, and if your site has a low conversion rate, you could easily lose money. On the other hand, if the term has few people bidding on it, then a higher position will only cost a few pence more and generate loads more conversions.

Clearly, a simple one word answer isn’t quite going to cut it¦

Before answering the question, there are a number of general rules of thumb that can be applied to PPC adverts.

So what do you need? Well, we’ve said that the conversion rate increases as you move down the results, and that the click through rate and cost per click fall. You need to put numbers to this. Something along the lines of:

Position CTR Conversion Rate Cost/Click
1 10% 1.50% £1.50
2 8% 1.50% £1.30
3 6% 1.50% £1.10
4 4% 1.50% £1.00
5 2% 1.50% £0.90
etc

Don’t use the numbers above, I’ve just made them up, and they will be different for each campaign, and probably even each Adgroup or even each keyword. The only way to get these is to move your advert around for a little while, and get them. Once you’ve done this a few times, you can get some feel for them and make a few guesstimates. This is really the only time that the Quality Score influences your bidding - in the amount that you have to pay to appear in each position.

Once you’ve got this table, calculate the cost per conversion (by dividing the cost per click by the conversion rate). Subtract this from your approximate income per conversion (take into account the cost of the goods/services!), and you get the ˜profit’ per conversion. So for the above figures, with product that retails for £150, with a cost to you of £75, the results would be:

Position Conversion Value Conversion Cost Profit/Conversion
1 £75 (£1.50/1.5%) = £100 -£25
2 £75 (£1.30/1.5%) = £87 -£12
3 £75 (£1.10/1.5%) = £73 £2
4 £75 (£1.00/1.5%) = £67 £8
5 £75 (£0.90/1.5%) = £60 £15
etc

As mentioned earlier, this will always increase, as you move further down the rankings, especially if the conversion rate is higher further down the results. It should also level out quite quickly , the cost per click for 11th and 20th are usually reasonably close together, and click through rates won’t vary too much either¦

Next, multiply this by the conversion rate (to get the profit per click) then the click through rate. This will turn the profit per conversion into the profit per impression. Multiply this in turn by the impressions per day (or month or year) to get the profit over that period. Here, we’ll assume 1000 impressions per day.

Position Conversion Value Conversion Cost Profit Per Conversion Profit Per Click CTR Profit Per 1000 Impressions
1 £75 (£1.50/1.5%) = £100 -£25 = (-£25 * 1.5%) = -£0.38 10% = -£0.38 * 10% *1000 = -£38
2 £75 (£1.30/1.5%) = £87 -£12 = (-£12 * 1.5%) = -£0.18 8% = -£0.18 * 8% *1000 = -£14
3 £75 (£1.10/1.5%) = £73 £2 = (£2 * 1.5%) = £0.03 6% = -£0.38 * 6% *1000 = £1
4 £75 (£0.90/1.5%) = £60 £15 = (£15 * 1.5%) = £0.23 4% = -£0.38 * 4% *1000 = £9
5 £75 (£0.80/1.5%) = £53 £22 = (£22 * 1.5%) = £0.33 2% = -£0.38 * 2% *1000 = £7
etc

You can multiply this by the number of impressions, in order to get a daily profit/loss for each position if you like.

So, in the above example, the sweet spot is 4th, though any position below fourth will also show a small profit (as the income for each unit sold will always be more than the cost below this point).

Is all this work worth it? Perhaps not, if you are in fourth position, and haven’t got the budget to move into first or second , but the general rule is very useful. If you lower your bid, you’ll get fewer conversions, but each one will cost less, and if you raise it, you’ll get more conversions, but each one will cost a bit more.

What you will find, is that there are few situations where the top position is the most profitable. Even if your site converts better than your competitors, your advert has a better click through rate, and your margin on sales and average order value are better, you are still relying on them to do the same calculations that you have.

Otherwise they could be bidding over the odds, and competing with them just means that you lose money, they lose money and Google gets richer!

Note that the cost per click here is the actual cost per click, not your bid (refer to the last section on Quality Score if you don’t understand why your cost per click is lower than your bid).

Page last updated by Steve Baker on May 11, 2008 at 7:10 pm.

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