When it comes to the volume-efficiency tradeoff in pay per click auctions, it’s a rule
that as keyword bid increases, conversion volume increases; but efficiency as measured
by cost per acquisition remains the same or gets worse. But it may be possible to overcome
this barrier by focusing on non-bidding aspects of the campaign:
Improve the creative of your PPC advertisements
Add negative matches
Improve your landing pages
Add keywords
Increase the conversion power of your website as a whole
The Impact of Conversion Rate on Volume and Efficiency
In order to analyze the impact of these tactics, on the two joint goals of pay per click advertising: volume and efficiency, the following equations can be used:
where:
ck are the clicks generated by a keyword per hour.
ak is the probability of conversion occurring after a visitor arrives at the site from a click-through on keyword k.
Ak is the number of acquisitions generated by a keyword per hour.
bk is the bid price of keyword k.
(1) says that the number of acquisitions you generate is equal to the volume of clicks you
receive multiplied by the probability of a customer converting, conditional upon arriving
at your site from the keyword. (2) says that your cost per acquisition will equal your bid
price over the acquisition probability.
Let’s say that you manage to increase the conversion rate ak through implementing some of
the tactics described above. Let’s assume that the increase is by a growth factor G. The
new number of acquisitions A+ and cost per acquisition CPA+ are below:
Here is where something really exciting happens. Let’s say you originally had an advertisement
that said “Buy our widget,” and replaced this with “Buy our fabulous widget,” the conversion
rate might increase from 10% to 20%. According to those equations, such an increase is
predicted to cause not just one, but actually two affects. It will both cut the CPA in half
and double the number of conversions.
It gets better.
You are now operating under the required CPA. You can, therefore, increase your bid price. Just
how high can you raise your bid price? A quick inspection of equation (4) reveals that CPA+=CPA if bk+=Gbk
Returning to the example, let’s say that you were bidding $2.58. You may now bid $5.16 and still
achieve the original CPA.
The number of additional conversions at the new bid price will depend on how many higher positions
in the paid search results you can buy. This, in turn, depends on the distribution of other bidders
in the auction. If you are unlucky, your increased spending power will not be enough to buy the next
highest position. However, if your increased spending power were able to buy one or more higher
positions, it could deliver an exponentially greater number of conversions, since the increase in
clicks due to position is generally exponential. We could be talking about a lot of conversions.
To summarize, an increase in conversion rate by a factor of G will:
Decrease the CPA by a factor of G.
Increase the number of conversions by a factor of G.
If still more conversions are desired, allow the bid price to increase by a factor of
G while maintaining the same CPA.
Conclusion
Although optimization of bid prices is a critically important area, it is only half of
the challenge. Improving your landing pages and advertising creative, adding keywords
to your campaign, increasing your site’s conversion power, and adding negative matches
all affect the conversions and cost equation. A comprehensive pay per click advertising
campaign will combine smart bidding with smart creative tactics.
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