THE RKGBLOG

Why Positional Bidding Guarantees Inefficiency

Position-based bidding guarantees that you will spend money inefficiently. Most bidding systems available for rent are position-centric. Most SEMs use position-based bidding systems. If you or your SEM are using one you are leaving money on the table.

Note: some companies use PPC advertising as a branding channel, and couldn’t care less about measurable ROI. To those folks, pay no attention to the man in the corner office, but for the rest of us…

It is well known that the quantity of traffic is directly dependent on position: the higher on the page, the more traffic you get. The cost per click (CPC) varies unpredictably with position because it is based on what your competitors in the space are doing.

The little known fact about paid search is this: the quality of traffic is largely independent of position on the page. Conversion rates and average order sizes, ie: Sales Dollars per Click (SPC) vary widely by term, but for a given term are about the same at the top of the page as they are at the bottom of the page. If fact, SPC tend to be slightly worse towards the top of the page than towards the bottom, but this variance is a third-order effect. For all intents and purposes the value of a click in position 10 is equal to the value of a click in position 1.

The key to maximizing sales within your required advertising efficiency is to pay no more and no less per click than you can afford for each term based on the value of the traffic each keyword phrase generates. Bidding more than you can afford on a term means generating more unprofitable traffic; bidding less than you can afford means your ads will be lower on the page, generating less traffic than they could be profitably.

While the SPC is relatively constant for a given term, the CPC required to be in any given position changes all the time based on what your competitors bid. This means that fixing your ad in a position guarantees that when your competitors dictate you’ll spend more than you can afford for traffic. Just as damaging, at other times you’ll be lower on the page than you could afford to be thereby losing traffic that you could profitably have had. In fact, positional bidding guarantees that you will only bid what a term is worth by coincidence, and those coincidences will happen rarely.

Proponents of positional bidding will say: “hey, we’re generating sales and hitting our efficiency targets.” Our response: “Sure, if you combine the right amount of overspending with the right amount of underspending, you’ll be right on target, it’s just that your sales will be much lower than they could have been had you bid properly.”

Why is positional bidding so prevalent? Because it’s easy. You set position targets for each term, the system runs scripts against the engines to see where your ad is. If it’s too low, bid more and check back in an hour; if you’re above the target position on the page bid less and check back in an hour. Repeat as necessary.

Managing to efficiency in the position-based world means periodically “adjusting the positions” of terms that are underperforming. The problem is that “adjusting the target positions” doesn’t actually address the root of the problem. You’re still giving control of CPC to your competitors; you’re still not bidding what you can afford. You will likely still be either spending too much, or too little for the term you’ve just adjusted. This solution ignores the underlying economics of search and therefore leaves money on the table.

A much better, albeit more complicated bidding system sets bids based on the value of the traffic each term generates with an understanding of low probability statistics, seasonal fluctuations, varying product margins, time of day, day of week, etc. Hard to build, but if you can do it, the results are worth it.

Technorati Tags:

Comments
4 Responses to “Why Positional Bidding Guarantees Inefficiency”
  1. slowXtal says:

    “The little known fact about paid search is this: the quality of traffic is largely independent of position on the page.”

    Could you kindly provide us with some publicly available pointer supporting this claim ?

    Thanks a lot for sharing your thoughts !

  2. We’ve done a great deal of research on this internally, but have not published the results of that work. We also did some collaborative research with the University of Rochester on the subject and co-authored an academic paper which can be found here: http://digital.mit.edu/wise2006/papers/4A-2_PinkeretalWISE2006.pdf

  3. slowXtal says:

    Quite interesting indeed !

    Thank you.

Trackbacks
Check out what others are saying...
  1. Positional Bidding Considered Harmful

    Are your pay-per-click search campaigns being bid by position, or being bid to your economics?
    If the former, you may be leaving money on the table.
    George Michie of RKG writes:
    The little known fact about paid search is this: the quality of traffic is…