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Monday, August 25, 2008

Keyword Bidding Strategies-Google AdWords

Monday, August 25, 2008

  • How does AdWords Keyword Bidding Strategies Work?
  • Why Google charges less than you bid for a keyword?
  • What does the following answer by Google mean to you?

“The AdWords Discounter monitors your competition and automatically reduces your actual CPC so you pay the lowest price possible for your ad's position on the page.” Google Answer

The answer to the above question is -Vickrey Auction.

What is Vickrey Auction?

A Vickrey Auction is where the highest bidder wins - but he/she only pays the second highest bidding price. Now Read carefully the above message by Google Answer.

Yes, the above message verifies that AdWords follows Viekrey Auction or Sealed-bid auction or second-price auction.

Advertiser B's bid = $15
Advertiser C's bid = $12
Advertiser D's bid = $10

If there are 3 ad spots in this auction, then the ad spots will be assigned to the top 3 bidders: you, Advertiser B and Advertiser C. The value of the ad is figured as the value displaced by your participation, which in this case is Advertiser D's bid. You therefore pay $10 for the ad spot. Advertisers B and C will also each pay $10 for their ad spots.

If you wanted 2 of the 3 ad spots, your bid would be $18 x 2 = $36. You'd be displacing Advertiser C as well as Advertiser D, so the value displaced would be:

Advertiser C's bid = $12
Advertiser D's bid = $10

You'd pay $22 for both ad spots - much lower than the $36 you were willing to spend.

The important thing to remember is: bid what you're willing to pay. You'll never be surprised by ad spots that go over your maximum CPM, and our system will figure discounts when possible as a result of the auction. (Source: AdWords Google Support)

If you participate in a Vickrey Auction, you can safely bid the maximum price that makes sense to you in the knowledge that if you win, you will pay less than this. If everyone understands this, they will all bid the maximum they can afford and the seller does very nicely. Furthermore, no one ends up paying more than they can afford.

If budget is not a problem, one can go ahead with this strategies to win the slot but it carries high risk of losing huge chunk of money. However, it also might help you win the top slot on Google Paid Search listing at lower CPC next to the bid set by your competitor.

I strongly suggest for small business or advertisers with low budget not to engage in Bidding War, as explained above.

Why it can be dangerous to bid high?

Google uses a variation on the Vickrey Auction model to determine how much you pay when your ad is clicked. Let's look at the situation when three people again are bidding.

A bids $1.20
B bids $2.50
C bids $1.21

B wins the bid, but Google sets the price paid at 1 cent ABOVE the next highest price. In this case then B has to pay $1.22 for the click. This is well below the price he bid.

Now it may be that B simply set his price high because he thought that $2.50 would guarantee top slot and that everyone else would be bidding much lower which in this case was true.

But suppose C also adopted the same philosophy and bid $2.30 instead of $1.21.

A bids $1.20
B bids $2.50
C bids $2.30

In this case, B would still win - but would have to pay $2.31 for the click this time.

This shows why it is dangerous to bid too high just to achieve a high ranking. You can't always assume you will pay much less than your maximum bid price.

2 Additional Google Twists

Just to make the process more complex, Google adds a couple of twists to this process too.

In the above examples, we talk about bid prices measured in dollars and cents. In practice, Google uses a different "currency". Let's call it your bidding power.

Your bidding power is equal to your bidding price multiplied by your ads popularity for the relevant keyword. What this means is that your bidding power doubles if you run ads that achieve twice the click through rate of competitor ads for a given keyword even if you are bidding exactly the same amount of money per click.


Bid price $2.12
CTR 2%
Bidding power = 414

Bid price $2.12
CTR 1%
Bidding power = 212

When you bid in Google's real time auction for an ad, it is your Bidding Power and not simply your bidding price that determines where your ad will rank.

If you get a high CTR, you can still have a higher Bidding Power than your competitor who is bidding a higher price than you. This is why it pays to have ads that get the clicks.

How this fits with the Vickrey Auction

The model is the same as the dollar-only model we first discussed but this time, instead of costing you dollars and cents per click, you get charged an amount of Bidding Power.


A bids 400 Bidding Power Units
B bids 300 Bidding Power Units
C bids 349 Bidding Power Units

A wins the bid but pays only 350 Bidding Power Units. (1 more than the 2nd highest bidders bid of 349)

Google charges A in dollars and cents so how much does he pay?

The answer depends on his Click Through Rate. If he has a CTR of 1% he will pay $3.50 because 350 x 1 = 350.

On the other hand, if he is achieving a CTR of 5% (which is what top performing ads can achieve), he will pay 70 cents (70 x 5 = 350)

The second complexity that Google adds to this system is that a similar process goes on for each bidder in order to determine the final order in which ads appear.

Finally don't forget that the click through rate you achieve for each keyword will depend in part on the ad that gets displayed for the keyword. You need to maximize this and the best way to do this is to run several ads at a time and see which ones generate the highest click through rates.

Part of the process of managing your account is to delete poor performing ads and create ads that beat your best performing ad to date.

Key learning points

  1. Treat your Click Through Rate at least as importantly as your Maximum Cost Per Click price.
  2. Don't over bid for keywords unless you are sure no one else is doing the same.

Courtesy: FactsAboutAdsense

Thoughts Aside

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