I need to be in position 1! I need to be ahead of my competitors! I need to show up all the time for this keyword! I need to be in the top 3 or I won’t be seen! Wrong, wrong, wrong, and, yes, wrong.
Too many marketers and business owners react emotionally to AdWords. Oddly enough, they have the data available to make accurate decisions, but they let their egos get in the way. Bidding to a specific position in AdWords is B.S. There, I said it (AdWords gurus freak out…now). But…I have data to back it up.
Your average position is a dependent variable. Here’s why – your conversion rate is not influenced by any of AdWords’ metrics. Your click-through rate, average position, impression share, quality score etc. have no influence on your conversion rate. None. So what does this tell us? Your average positions need to be determined by your conversion rates and CPA goals and nothing else. You can’t predetermine the output of the equation before solving the problem. In other words, bidding to position is an anecdotal guess, and why guess when you can be empirical? Time to debunk these myths with actual data.
Myth: I need to be in position 1!
To be blunt, I hate this. My first question is, why? I understand this logic for your brand terms where your ROAS is 1000%, sure, you want to own that position. Aside from that, you should only own the top position if it is maximizing your profit. Period. There’s no other reason to own it, unless your whole initiative is for branding, but I’d advise against that, as there are much better branding options. If you’re limited by budget, you’ll actually get more clicks within your budget by bidding down, and if you’re not limited by budget, and you don’t have a killer ROI, then you are just letting your ego get in the way of your business sense.
Let’s walk through an example and data to illustrate. We’ll use a basic lead generation example, as e-commerce adds additional layers of complexity that I’ll address later.
If you’re a car insurance broker in Boston, you should have a determined cost per acquisition goal to satisfy your business objectives. Let’s use $100 per lead. You then need to look at your current conversion rate in your AdWords account and use that as a starting point, say 5%. Next, you will use this information to determine your Max CPC. Use this formula: Max CPA x Conversion Rate = Max CPC, $100 x 5% = $5. If you have enough data, you can, and should, determine this at the keyword level. From here, your ad rank is determined by this formula: Max CPC x Quality Score = Ad Rank
So what does this tell us about ad rank? First, let’s look at the variables that affect ad rank in order of our ability to control them:
- Ad Extensions – Easiest to control and implement (negligible effect)
- Max CPC – Easy to control and implement, just a little more complex
- Quality Score – Moderate ability to control (CTR, Landing Pages, etc.), takes time, a number of different variables beyond control
- Competition – No Control
But again, these are all the variables that determine the ad position, not the other way around. So what this really tells us is that we need to control what is within our control, and your ad position will be the output not the input. Targeting a certain position without considering these factors is nothing but a bad guess.
For e-commerce, there are whole host of other variables at play. But still, at the most fundamental level, the Max CPC formula still holds true. However, you will need to determine target CPAs based on another set of variables before arriving to the basic formula. These variables include, but are not limited to – Product Margin, Average Order Value, Return On Ad Spend, Lifetime Value, Landing Pages (Check out www.youshouldtestthat.com via Chris Goward @chrisgoward at ClickZ NYC). This perhaps is a topic for version 2 of this post, but these variables only further my point.
Now, my point would be false if in fact the claims I’ve heard countless times about ad rank were true, but they aren’t. You do not convert clicks more in position 3 because “people read these ads” and, no, you aren’t proving you’re the best in position 1, and enticing people by “beating” your competition. The truth is that there is no correlation between ad rank and conversion rate. Your conversion rate is the same in position 1 as is in position 3.
In the regression below, you can see that average conversion rate remains flat regardless of average position, R squared = 0.002, suggesting no correlation.
Of course, being in low positions will cause your volume to be limited, but you need to look at other factors beyond your bid before you decide to push up in position. What then can you control? Your offer, landing pages, price, the UX of your site, quality score (to an extent), and seasonality are good places to start. You need to get these factors under control before you go after top positions, not the other way around. If you’re aggressive and willing to accept a higher CPA to test, then sure, go for it to collect data, but if you have a strict CPA goal that leads you to profitability, you simply can’t play in a position that is out of your price range if you want to hit your goals.
Myth: I need to show up all the time for this keyword!
This same argument then holds true for impression share. To illustrate this point, let’s revisit our previous example. We’ve determined that our Max CPC can only be $5 based on our target CPA and conversion rate. Car insurance brokers in Boston often see an average CPC of $40+. Your $5 Max CPC bid will likely gain you <10% impression share, meaning you’ll be lucky to grab a click a day.
So what is the solution here? Bid up to first page? No. Be seen in the top 3? No. You may be tempted to push your impression share higher, as you’re currently losing 90% of your potential impressions due to ad rank (i.e. your competition). As John Gagnon (Bing Ads Evangelist @jmgagnon) shared at the ClickZ conference in NYC, if you see “% Lost due to bid” in Bing or in Google’s language “Impression Share lost due to ad rank,” your bid might not be high enough to even enter the auctions you want to be in. What John said makes total sense. My challenge to marketers then is not can you pay to be in the game, but rather, is your offer even good enough to be in the game? Increasing your impression share won’t improve your conversion rate. So, throwing money at your bids to attract more volume will only cause you to close your business doors before ever being competitive. In this regression, we see no correlation between conversion rate and impression share.
Myth: I need to be in the top 3 or I won’t be seen!
Two things are important here. First, people click on ads below position 3. A client of mine had 43,000 clicks last month in average position 4.4. Second, average position doesn’t mean you’re always in that specific position. There can actually be high variance here, and your positioning may actually look something like this for an average position of 3.
Yes, your volume begins to drop as your average position declines, but if you’re in a big volume space (e.g. travel), you can get the volume you need. If you’re in a low volume space (e.g. local dentist), a low position may only drive a handful of clicks a day. But again, you need to get your offer right unless you just want to burn your cash.
So what’s the big takeaway? Don’t bid to position, bid to profitability. Stop listening to your ego and the AdWords gurus, and start listening to what your data tells you.
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