Maximize Incremental ROI with Google’s Bid Simulator

A few days ago, Google rolled out a beta version of its new bid simulator tool to additional accounts.  I am excited about this because it facilitates new bid management approaches, enables marketers to improve the efficiency and return of their paid search campaigns, and may shake up the industry a bit.

Thus far, search marketers have not had a reliable way to determine the impact of a bid change short of, well, trying it.  And “trying it” may affect the campaign deleteriously as well as carrying with it a cost in human effort to implement the change and to measure its impact.  Will doubling that Max CPC double your actual CPC, increase it by 50%, or have no impact at all?  Will reducing your actual CPC by $0.50 halve your traffic, reduce it to zero, or have no impact at all?  Based on the ad auction process and users’ behavior on the search engine results page, all of these scenarios are possible.

Google’s document describing the bid simulator emphasizes the ability to optimize based on the incremental cost per click (ICC), “how much extra you need to pay for the extra clicks when moving from a lower bid to a higher bid”.  Indeed, savvy search marketers constantly explore the bid space and adjust bids to maximize incremental ROI, at least for the highest-volume search queries.  For example, on April 18th, we reduced by about 60% the actual CPC of an exact match keyword that was not hitting its budget limit.  The paid search visits and conversion events did not drop it all, providing the same amount of value for the end advertiser at 60% less cost:

Maximize incremental ROI with bid simulator

There are three reasons this may happen.  First, Google sometimes promotes an ad with a high “quality score” to the top of the SERP, putting it ahead of competitors with higher Ad Rank.  You can pay to stay ahead of your competitors, but you may not have to!  Second, sometimes dropping from first position to second or third position does not reduce the click-through rate or quality of visitor.  Finally, if you reduce your bid and end up behind your nearest competitor on the SERP, that competitor’s CPC typically goes up, sometimes very significantly.  The competitor may reduce its bid in response to your change.

Google’s bid simulator understands Google’s ad auction process, so it should indicate the correct rank in the first scenario.  In the second scenario, the bid simulator should correctly identify the bid range for each SERP position, but may not correctly estimate your click through rate.  The bid simulator will not be accurate in the third scenario because it is completely based on the previous week’s actual bids and does not include a predictive component for estimating competitor bid changes.

Two caveats.  Google states that the bid simulator will not work for campaigns that are hitting their daily budget limits.  Most of the time, reducing bids and eliminating low ROI keywords yields a far better optimized program than using daily budget limits to contain spend, so hopefully this is not much of a constraint.  Google also warns that “for broad match keywords, the number of impressions can change dramatically” because a change in bid affects on which search queries your ad shows.

The most common reaction I receive when explaining how to use the bid simulator to reduce CPCs of keywords with poor ICC is “Why would Google provide a tool that helps me reduce spend on certain keywords?”  Rephrase this to “Why would Google provide a tool that improves the efficiency of paid search?”, and it makes sense.  Search marketers will strive to redeploy cost savings to other keywords, and the bid simulator facilitates doing this effectively.  Ultimately, Google is competing against other search engines and other advertising channels.  Improving the efficiency, ease of use, and transparency of the ad auction process will attract more paid search advertising dollars to Google.

Actionable Insight #1: Use Google’s bid simulator to find keywords whose bids you can reduce substantially without reducing their traffic much.  Start with the keywords with the highest total spend since that is where the greatest potential savings lie.

Actionable Insight #2: Optimize your campaigns based on incremental ROI/incremental cost per click.  If you are in the market for a bid management tool, make sure the one you select does this.

Actionable Insight #3: If you outsource management of your paid search program to an advertising agency, it is OK to spot-check the performance occasionally.  Tools like Covario’s Paid Search Insight and Google’s bid simulator facilitate this.

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