ClickEquations Blog

When Google’s Hal Varian talks, we listen. We first met Mr. Varian – Chief Economist at Google – in his ‘Introduction to the Adwords Auction’ video and it sparked one of our most-read posts (The Economics of Quality Score) in which we took his information and used it to determine the financial of specific Quality Scores or Quality Score changes.

Last week Mr Varian spoke again, this time on the AdWords blog, but with equal import. He shared the fact that his team had studied the impact of position on conversion rate, and found that conversion rates were about the same no matter if your ads are run in position 1 or position 8.

Today SearchEngineLand published an article I wrote concerning the importance of this revelation.

While the video shared new truths that helped our understanding of Quality Score, this new information has impact almost entirely on bidding.

I’ve been spending a lot of time lately working to really understand bidding – I’ll admit it’s not something I’ve focused on before because it always seemed vastly over-rated as a factor in paid search success. I still believe bidding gets more than it’s share of attention in the PPC world, but for very different reasons than in the past.

Bidding is probably the most misunderstood component in a system full of misunderstood components. This is true because we bring assumptions about the role of bidding in an auction which turn out to be true in the modified ‘auction’ that Google and the other engines run.

The result is often wasted money, but more often it is deliberate actions which have virtually no chance of accomplishing their objectives. We change bids as if raising them will push our keywords up and lowering them will drop them down. The problem is it’s not that simple.

As the the SearchEngineLand article describes, Mr. Varian is doing us all a huge favor by clarifying how various elements of the AdWords auction and system really work. But we’ve got a long way to go…

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The fall-out from Google’s Hal Varian Quality Score Video continues.

One early impact was finally understanding exactly how quality score impacts your cost-per-click.

A more interesting idea to get your head around: Your bid is not used in the calculation of your cost-per-click.

Isn’t that amazing?

How CPC is determined
Using the information from the Google video, and some other Google-documented facts, let’s look at the exact sequence of steps that determine the position and cost-per-click of your ad.

1. Joe Smith types his search query into Google and clicks ‘Search’
2. Google and (using their ‘infinite wisdom’ machine) decide which advertisers have keywords and match types and budgets and geo-targeted day-parts that make their ads eligible to be shown.
3. Google calculates, in real-time, the Quality Score for each eligible keyword.
4. Google multiplies Quality Score x MaxCPC for each eligible keyword to determine the Ad Rank of each keyword.
5. The eligible keywords are sorted by Ad-Rank, highest to lowest.
6. Starting from the top of the list, the CPC for each keyword is calculated by taking the Ad Rank of KW below it, and dividing it by the KW’s QS
   .
   So if my Ad Rank is 50 and my QS=7, and the following keyword’s Ad Rank is 45, my CPC = 45/7 = $6.42.

Bid Is Not A Direct Factor
Notice in Step 6: The bid was not a direct factor in the computation of the cost-per-click. It has a major influence, but it’s indirect, by determining your Ad Rank, which determines which keyword your rank above and that keywords rank is used to determine your CPC (by dividing by your quality score).

The ramification of this, beyond being a cool way to trip up friends at PPC cocktail parties, is that we have to rethink the idea of changing bids to change our costs or positions. There is an effect and relationship, but it is far less direct that we typically think.

Additional Steps
Just to finalize, there are some steps after the above sequence before the entire process is complete.

1. For the last keyword in the list, Google uses some minimum required bid to determine the price.
2. There is a minimum CPC below which ads will not appear – so not every keyword on the original list is displayed. Google decides this CPC, and perhaps how many ads they want to appear. The point is that some (or many) eligible keyword’s ads are not shown.
3. After the rank and price is set, Google checks the MaxCPC of each KW against the MinBid required for a TOP position (ads that appear over the organic listings rather than on the right) and may move some ads to the TOP. Note that this decision is based on MaxCPC not CPC, and an ad in Position 4 may jump over an ad in Position 3 to get to the top if it had a higher MaxCPC.

PS: I’m hard at work on my way-behind-schedule ebook ‘High Resolution PPC’. If you like this kind of how-it-really-works thinking about paid search, I think you’ll enjoy the book. Sign up now and we’ll alert you as soon as I can finish and you can download.

Because you can bid less and still have your ads shown on the first page.

In my experience it isn’t unusual to see the following:

A Portion of The Keyword Report from ClickEquations

On the top line we see a keyword with a FPBE of $1.93, a MaxCPC of $1.50, and an AvePos of 2.82 (clearly on the first page). And we see a healthy impression count. It seems like something doesn’t add up.

I can only surmise (I have no direct information from Google on this) that this proves it really is an estimate. The actual bid required to be on the first page varies on a query-by-query basis. (Our post on the Quality Score discount or penalty.)

This makes sense given what we now know about how Ad Rank is calculated and the fact this is done in real-time for every query. So for each search Google:

1. Calculates the Quality Score of each bidder, then
2. Calculates their Ad Rank to determine position, then
3. Determines price based on the Ad-Rank and Quality Score, then
4. Figures out if any ads are eligible to get a Top Position, then sometimes
5. Decides how many ads they want to show

So there are two chances for your ad to not appear on the first page:

1. Your Ad Rank is too low to earn a spot on the first page.
   This (again) is Bid x Quality Score so you have to variables to work on to fix this.
2. Google limits the number of ads they display, even though there are more bidders.

What This Means For Bidding and First Page Bid Estimate
You shouldn’t feel compelled to bid all the way up to or past the FPBE number. Check your Average Position, and Impression counts before making a decision.

The effect of seeing the First Page Bid Estimate is to feel compelled to raise your bid to hit it – at least. That might be a good idea, it might not, and it may not be necessary (assuming your goal is a page 1 appearance with 100% Impression Share).

Test the impact of bids around the FPBE on both your position and impression count – it’s possible you’re below but losing very few impressions.

What Else It Means
Google is still hiding too much from advertisers.

The move to First Page Bid Estimate was a positive one, but we’re still not told:

• How they decide how many ads to show for any given query,
• How they establish minimum bids for a particular query (the price the lowest appearing person pays)
• How they determine the bid requirements of a Top Position (and what it is for any particular keyword or query)
• And our only clue about any of this – Impression Share – is still available at the Campaign Level only.

We’re left guessing and testing when we’re rather be considering and deciding.

NOTE: This is the 2nd post in a series. The first one is here.

While Google’s Adwords Quality Score gets a lot of attention, an important and somewhat related keyword metric – the First Page Bid Estimate – hasn’t had quite as much coverage.

I’m going to tackle this one in two parts, today talking about how to monitor your FPBE’s (First Page Bid Estimates) and then in a future post digging deeper into the philosophy, politics, and implications of this metric. (You can tell that’s going to be the fun one.)

In the Adwords interface, the First Page Bid Estimate can be found on the Keyword Analysis page, which requires you first to mouse-over the magnifying glass icon next to the keyword, and then choose the ‘Ad Showing: Details and Recommendations’ link.

First Page Bid Estimate in the Keyword Analysis Window

Of course, you probably don’t care about the FPBE unless your current MaxCPC is below it. These keywords are more clearly identified, with a simple message shown below the Status indicator for each keyword.

First Page Bid Warning in Adwords

You can also add ‘Est. First Page Bid’ to a Keyword Performance Report in the Adwords Report interface and the metric has also been added to the latest version of the Adwords Editor.

In the Adwords Editor, you can even select the entire account, sort by the FPBE, and see your current Quality Score and MaxCPC in adjacent columns. This is the most useful presentation as those are the three metrics you need to both understand and use to decide on corrective action.

First Page Bid Estimate in Adwords Editor

First Page Bid Estimate Report – In ClickEquations
In ClickEquations we wanted to make use of First Page Bid Estimates even easier and more convenient.

So like the Adwords Editor, we provide the FPBE, Quality Score, and your MaxCPC next to every keyword so you can always keep an eye on these important metrics. And you can easily sort by any column to spot issues or trends.

ClickEquations Keyword Report with First Page Bid Estimate

But using ClickEquations Analyst we’ve taken it one step farther, providing the First Page Bid Estimate Report.

This Excel Template makes it easy to see your current keywords, sorted by FPBE in descending order, along with the corresponding QS, MaxCPC, Ave Position, Campaign & AdGroup names – plus a red-alert warning when you need to raise your bid to hit the FPBE.

First Page Bid Estimate Report in ClickEquations Analyst

Just by glancing down this column you can see which keywords require attention, and how much that attention is going to cost you. The data in the report can be updated with a single-click.

Keywords in your account which are currently bid below their First Page Bid Estimate are either not showing (if they have a low Quality Score) or showing at a highly diminished rate.

In effect, you’re currently not actively advertising on those keywords, which is why we think this kind of quick summary report is important.

In Part II of this post we’ll dig deeper into the why’s and what-to-do’s of the First Page Bid Estimate.

Average Position occupies an important place in the mythology of paid search.

Many people covet or chase higher positions, and there are several possible reasons:

1. The assumption that ads in higher positions get more clicks simply because they’re in higher positions.
2. As we all know ‘higher is always better’ – especially when it costs more.
3. And of course, eye tracking studies prove, um, er, that people look higher more often.

(The empirical and anecdotal evidence I’ve seen suggests that the power of higher positions is much less than most people seem to imagine. In a future post I’ll go into this in great detail. This is not the real subject of this post.)

As a result, there is a lot of attention paid to the Average Position metric. And a LOT of money is spent on upward bid changes made because of the number this metric reports.

So how good is this number? Probably not very good.

Let’s take one tiny little case study to demonstrate.

The keyword is ‘cat treatment’. And on Saturday Jan 3rd it produced about 25 clicks in one of our accounts. The average position for the term (in broad match) was listed as 4.55. This is the average of all the positions in which it appeared during the 1543 impressions it enjoyed that day.

Now be honest, despite all you know about averages (including the fact that it could have appeared in position #1 760 times, and in position 8 783 times) when you see that 4.55 was the average it makes you think it spent the day bouncing between position 4 and position 5. Right?

But did it?

Let’s look at Google Analytics’ handy Keyword Position report for this keyword on that day. This shows the position the keyword was in when it earned its 25 clicks.

Yowza!  This keyword covered more ground than Paris Hilton in NYC on Saturday night. (I always wanted to see how much Google traffic a single Paris Hilton reference caused.)

It was in all three top positions, and everywhere on the right side from position 1 to position 6.

Keep in mind that this is a map of clicks, not impressions. So maybe the impressions did cluster closely around the 4.55 average and the few stray impressions way up to top 1 and down to position 6 just all got clicks. Or maybe the actual impression distribution was extremely broad and the 4.55 average, while it is true, is really not useful to us in terms of analyzing keyword performance or making bidding decisions.

At this point only two things are really clear;

1. We really need better information. If the search engines won’t provide the actual impression and click position distributions, and/or make the the position-at-time-of-click a macro that can be delivered in the target URL, they should at least provide the standard deviation for the average position so we have some idea of what it really means.
2. We should resist the urge to put much faith, or make too serious of decisions, based on the reported Average Position of any keyword.

After all the recent attention on Quality Score, I had planned to turn my attention to bidding, and write a series of posts on this important PPC topic.

But I think Ad-Rank deserves a little attention first.

Ad-Rank doesn’t get very much attention – certainly a lot less than bidding, and even a lot less than Quality Score. But Ad-Rank determines your position, and to some degree whether your ads display at all.

Ad-Rank Defined
According to Google, “Ads are positioned on search and content pages based on their Ad Rank. The ad with the highest Ad Rank appears in the first position, and so on down the page.”

Ad-Rank = CPC bid (Max CPC) × Quality Score

So we bid to gain Ad-Rank.

And we care about Quality Score because (among other things) it helps us achieve Ad-Rank.

Ad-Rank and Quality Score
Quality Score is important because it is weighted equally with your bid in determining where/if your ads run. The two factors are intertwined and the result is interdependent.

As the chart at right shows, you can get the same Ad-Rank with a lot lower bid by improving your quality score.

And as Quality Score gets more important, bidding gets less important. Not unimportant, but less important. It’s a zero-sum game.

Ad-Rank and Bidding
Yet while Quality Score is getting more visibility and mind-share than ever before, I’m not sure its ascent is being considered when thinking and acting on bidding.

Creating bidding strategies and running bidding rules or using bidding algorithms that don’t take QS into account at all, seems strange and seriously sub-optimal.

Traditionally bids are decided in an effort to impact position, and often the assumption is made that when an increased bid resulted in a higher ROAS or ROI, it was the change to the bid that was the direct cause – but I don’t know of a rule or algorithm in any PPC software today that either a) checks the actual position impact or b) checks to see if a Quality Score change was a mitigating factor.

It should of course now be noted that both bid and quality score increases have other impacts beyond their influence on Ad-Rank; Google has said that minimum bid and quality score thresholds are set for achieving Top (as opposed to Right Column) positioning, for example. So there are cases where it’s wise to increase your bid regardless of Quality Score issues.

Ad-Rank and You
The core tenant of High Resolution PPC is that we’ve all been lulled into an over-simplified view of how paid search works, both to accelerate our adoption, simplify our understanding, and keep us from complaining about really unfair or opaque aspects of the system that is taking our money.

Ad-Rank is an open secret. It’s well documented, easy to understand, extremely important, and almost never discussed. Time to change that.

We’re pleased to announce that Google Adwords Quality Score and First Page Bid metrics are now available in ClickEquations.

All clients and trial customers can see these metrics in the Keyword Report tab. They’re also available in Excel via ClickEquations Analyst.

After our recent Quality-Score-palooza it’s clear the impact of Quality Score is growing for Adwords Advertisers.

We’re glad to be the first Paid Search Platform to deliver this important information in our product.

High ‘First Page Bid’ Problems
As with many metrics, ClickEquations Analyst makes it possible to turn data into actionable information and save a lot of time.

Our new First Page Bid Report template does just that. It reports your Google keywords sorted in descending order of First Page Bid, showing the current bid and amount to increase your MaxCPC to hit the First Page Bid (if that’s what you want to do).

This makes it easy to spot new high First Page Bids that might occur if your Quality Score drops, if competitors move in, or Google makes algorithm changes.

Click Image To Enlarge

The current Quality Score of the keyword is shown too, so you can decide if you’d like to change the bid or work on the Quality Score.

As with all ClickEquations Analyst reports, you can update the data with a single click, or run the report for different accounts or clients.

The new report will be provided to ClickEquations customers without charge.

Want your own First Page Bid Report? Start a ClickEquations Trial today!