1. Overview
& Introduction.
Anytime a user does a search on popular search engines such as Google
or Yahoo, in addition to the natural (or organic) search results, a set
of sponsored links are returned as well. These sponsored links are
essentially advertisements and when the user clicks on any of these ads,
the user lands on a “landing page” on the website of the advertiser.
In return, the advertiser pays the search engine for delivering a visitor
to their website.
More specifically, the advertiser chooses
a set of keyword phrases and states a bid amount for each such keyword
phrase. This bid is the maximum amount that the advertiser is willing
to pay the search engine when a user searches on one of the keyword phrases
(that the advertiser has bid on), and clicks on the ad.
In general, when a user searches on a
keyword phrase, a set of ads appear. The ads themselves are ranked
by the bid amount of the advertiser, and on both Google and Yahoo, by the
ad’s Quality Score. (This Quality Score is calculated by the search
engines - the higher the relevance of the ad copy and the landing page
to the keyword phrase searched on, the higher the Quality Score).
Note that in the model described here,
the advertiser only pays the search engines if someone clicks on the ad.
The amount they pay can never exceed their bid amount and is usually less.
It is a minimum amount required to keep the ad in position. So if
all ads had the same Quality Score, the advertiser would only pay 1c +
the bid amount of the next highest bidder.
2. Motivation
for Article
It is a well known fact that all other
things being equal, the higher up the ad
appears in sponsored links sections
in search engines, the more clicks it will get. Advertisers, therefore,
understandably try hard to get those top positions for their ads.
However, since advertisers are competing with other advertisers for those
top positions, higher up positions generally cost the advertiser more
per
click and therein lies the tradeoff
.In this article, I demonstrate that advertisers
should not obsess too much on the position of their ad in their campaigns.
Given an advertiser’s Expected Profits from a click and their Quality
Score relative to that of their competitors, there is an optimal
or profit maximizing position for their ad. At any given time, this
optimal position is just as likely to be, say, in the number 8 position
as in the number 1 position.
Even though this article is fairly Mathematical,
it only uses High School Algebra level Math. If you’d rather not
wade through the Math, then just know this: track profits against bid amounts
and decide what bid amounts generate higher profits. Then, let the
ad fall in whatever position it may.
3. Glossary
of terms used
Click Costs is the dollar amount
that an advertiser pays the Search Engines (e.g. Google/Yahoo) when users
click on their ad.
Click Through Rate (CTR) is the
frequency with which an ad is clicked on as a percentage of the total number
of impressions for that ad.
Conversion Rate is the number of users who buy as a percentage of
the users who visit the advertiser’s website.
Expected Gross Profits is expected or average profits realized
after someone clicks on an ad and lands on the advertiser’s website.
Expected Net Profits is Expected
Gross Profits minus Click Cost
Margin is the Sale Price minus all
the costs incurred to support that sale excluding Click Cost.
Point of Position Indifference is
the point at which an advertiser makes the same profits regardless of which
one of two positions, e.g. position number 1 or position number 2 their
ad appears in
Resources
