The only known fact about moving your ad higher up on a search engine’s results page is that it will cost more money per click than your current position. What is unknown about moving higher than your current ad position are the effects it will have on your other metrics, such as CTR, conversions, conversion rate, clicks, impressions and most importantly, profit.

Proving if it is worth paying a higher CPC to move up the page is really quite simple if you focus on profit. The question you must answer is this: If I pay more for a click to move up on the page, will I receive enough additional clicks to produce enough additional conversions, so that I increase my profit compared to what I was previously receiving?

Many advertisers focus exclusively on CPA, which is the wrong metric to focus on when evaluating higher ad positions. You should assume that your CPA will increase as your ad moves up on the page due to the increase in click costs. However, there may be more clicks to be had at higher positions, where increases in your sales volume and total profit outweigh the increase in click costs. Think that as you move higher up the page, you are following the Wal-Mart business model of ‘lower margins/more volume’, and if you choose to be lower on the page, you are following the Louis Vuitton model of ‘higher margins/lower volume’. At the end of the day, the question you need to ask yourself is, “Am I more profitable being Wal-Mart on this keyword or am I more profitable being Louis Vuitton on this keyword?”

As we attempted to answer this question, we structured a test for several of our clients in various industries. In order to draw decisive conclusions from this test, we focused on profit because it is the only outcome that would justify moving up on the page for our clients.

The test consisted of three phases:

Phase 1 - The Baseline:

Effectively, we selected a time to run the test where there were minimal outside influences that could alter the results. We made sure there was not a holiday, weekend, or some other event that would adversely skew our results. In running the baseline test, we simply kept all of our bids in their current state (baseline) and recorded the results day by day over a selected time period.

Phase 2 - Raise Max CPC’s By an Equal Percentage:

For the next step in our test, we chose a 100% increase in Max CPC’s from the first phase of our test (the percentage increase you choose can differ according to your ad position, budget and industry). From there, we documented the results from the CPC increase and matched them to our Baseline test to observe the differences (for each day of that testing period, we documented clicks, impressions, CTR, conversions, conversion rate, position, ad spend, revenue, profit, CPA and actual CPC and max CPC). Look at the table below to see the results of one of our tests.

Phase 3 & Review Results and Decide If Further Testing is Necessary:

After running Phase 2, you might find your results to be so abysmal that you do not need to test any further. We found our results to be quite interesting, so we continued our test with Phase 3. For example, though our conversions did not increase at the rate of the increase in CPC (39.48% vs. 89.32%), our conversions did increase more than the increase in clicks (39.48% vs. 25.25%). This means that our conversion rate improved as we moved up higher.

Another thing we discovered in this test, and in other tests across our client base, is there are large differences in impressions, clicks and CTR when your ad position is 2.9 or higher vs. 3.0 and lower. Being in position 2.9 and higher assures you of getting the maximum amount of exposure through syndication to the search engine’s search partners. We thought it would be ideal to find the ‘perfect’ max CPC where we would be at an ad position of 2.9, so that we enjoy the benefits of maximum syndication while paying the lowest CPC we could. Therefore, we tested several new max CPC levels during Phase 3 that were higher than our baseline, but lower than a 100% increase over the baseline.

Using this method, we were able find the optimal CPC per keyword for our clients, so they were at the optimal position where they earned the greatest return (profit). I encourage each reader to conduct a similar test following our methods and using a version of the table shown above to record your results.

For some of our clients, we determined that moving up the page did not increase profit. However, in many cases, it did increase the number of conversions they received. Some of our clients chose to forego profit because they believe acquiring more customers will make them more profitable in the long run. They were now earning customers that could have gone to their competitors and, because they are willing to focus on the lifetime value of a customer vs. measuring their profitability on only their first purchase, they could justify this new tactic.

The only true way to know if it is worth increasing your max CPC and ad position is to run the test stated above. If your ultimate goal as a marketer is to produce as much profit as possible, then you MUST perform these tests. You cannot assume that you are in the right ad position until you have properly tested to find which ad position will allow your business to maximize profit.

This entry was posted on Tuesday, April 8th, 2008 at 1:44 pm and is filed under PPC. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.