The Search Marketing Advisor Newsletter Article:
March 2005, Volume 4, Issue 3

Pay Per Click Bidding Theory: The Volume-Efficiency Trade-Off

by Brendan Kitts, Sr. Scientist, iProspect

Have you ever been asked to generate more acquisitions at a lower cost per acquisition (CPA)? Or more revenue at a higher return on advertising spend (ROAS)?

These may be worthy goals, but within pay per click (PPC) advertising campaigns, if your bid price is the only variable you are changing, they may be not just difficult, but impossible.

The Volume-Efficiency Tradeoff
Every time you increase your bid on a keyword, that keyword’s efficiency as measured by CPA or ROAS will remain the same or get worse. This occurs regardless of optimization method or keyword.

Not sure about this? I’ve included a proof here for the geeks amongst our readership who want to understand the auction dynamics and assumptions that lead to this conclusion.

The implications of this law on bidding are fairly profound. For any given keyword the following are facts:

It is impossible to get more acquisitions and a lower CPA.
It is impossible to get more revenue and improve the ROAS.
If you are at break-even now, it is impossible to spend more and improve the profit situation.

How is This Different from Traditional Marketing?
In some ways this may seem strange. If CPA increases from $0.10 to $0.18, this is like paying $1 to get 10 apples, and $2 to get - not 20 - but only 11 apples! This hardly seems fair.

In fact, this scenario isn’t completely new to the world of marketing. In surface mail and telemarketing campaigns, it usually costs more money to obtain a greater reach in the population. For instance, let’s say you decide to buy television advertising to reach everybody in the 25-35 age group between 7pm and 8pm. After a day you might reach 50% of your target audience and it cost you $1,000. If you’re determined to reach people in that demographic, you might run your advertisement for a second day. This time you reach some extra people who you missed the first night and reach 60%. If you persist another day, you might reach 62%. Time and cost are linear, yet conversions (reach) trails off. Your cost per acquisition will generally increase as you chase down every last customer.

Let’s bring this back to the world of PPC. You just got your pet PPC campaign running nicely and are regularly generating 100 conversions at a $45 CPA. At this CPA you are profitable. The natural inclination is to pour more money into the medium.

At this point you should pause. The Volume-Efficiency tradeoff means that when more money is added, and so more volume obtained, in most circumstances the CPA will get worse. Whereas before you got 100 conversions at $45 CPA, now you might get 150 at $55.

CPA declines because at the “micro” or keyword level, your extra money is increasing keyword prices, and the CPA on those keywords is therefore getting worse.

Global Optimization
These laws are iron-clad at the keyword level. However, the situation becomes more complex when managing a campaign full of differentially performing keywords. If the campaign’s previous bidding solution was sub-optimal, you can actually divert funds from poor-performing keywords onto good keywords, increasing prices and improving efficiency at the same time - and thus skirting the volume-efficiency tradeoff.

Let’s say a marketer were to spend 100% of their campaign budget on a keyword that generated no conversions (infinite CPA). Now let’s say they used a more rational bidding strategy. He/she increased the budget marginally (let’s say by $1) and now spread it across some keywords that do generate conversions. The marketer just improved their CPA (from infinity to some finite number) whilst increasing budget.

This ability to move funds onto different keywords is an example of “global optimization,” and is the principle on which a number of leading automated bidding tools are based.

Major qualitative changes in bidding aside, the Volume-Efficiency tradeoff remains a pretty reliable phenomenon. If you try to obtain more conversions by increasing your funding, you should expect to see a degradation in efficiency as keywords are moved into the upper positions of the auction.

Creative
If your automated bidding tool is doing a good job and you are unable to squeeze more conversions at the same CPA, you may yet be able to alter the fundamental Volume-Efficiency relationship by enhancing the non-bidding aspects of the campaign. This includes:

(a) Improve the creative of your PPC ads
(b) Add negative matches
(c) Improve your landing pages
(d) Add keywords
(e) Increase the conversion power of your website
----as a whole

In subsequent issues of the Search Marketing Advisor, we will examine the impact of these factors.

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The Search Marketing Advisor Newsletter Article: March 2005, Volume 4, Issue 3

Pay Per Click Bidding Theory: The Volume-Efficiency Trade-Off

The Search Marketing Advisor Newsletter Article:
March 2005, Volume 4, Issue 3