By Adam Goldberg

We live in an automated world. Automation makes things easier, but easier does not always mean better. An automatic car wash is great, but doesn’t your car look much better when detailed by hand? Microwaves speed up the time it takes to cook food, but everyone agrees that the quality of the food suffers. Customer service centers have been automated through call trees and voice recognition, but if you have an unusual problem, the automated system can’t handle it.

In this blog, we are going to take a look at Automated Bid Managers (ABMs). Many ABMs ask you to choose a target metric and to set a goal for the ABM to achieve. It then utilizes its own logic to achieve the goal you have specified. So, do ABMs make things easier and better, or just easier, which isn’t necessarily better?

One Metric in Spite of Another

With most ABMs, you set a cost per acquisition (CPA) or an ROI goal for the ABM to achieve. Let’s assume you asked the ABM to achieve a $20 CPA, and you are currently paying $1 per click. An ABM has some built-in logic that will tell it when to change your bids. After it determines it has enough data to make a decision and no sales have occurred, the ABM will reduce the bid and will keep reducing the bid the closer it gets to spending your target CPA with no sales to show for.

The problem with this bidding method is that you often end up achieving one metric in spite of another. The ABM has one objective in mind and that is to achieve your CPA. It is not worried that in order to achieve your desired CPA, it might only produce one sale. Will your CEO be happy if you achieve your CPA goal if that means you do not achieve your sales goals?

Latency

There are a couple delays that occur in the world of PPC advertising that need to be considered when making bid changes:

• The search engine’s reporting is delayed by at least 3 hours, or
• A conversion may occur days or weeks after the last ad was clicked.

Some ABMs can change bids in real time. They don’t know, however, what the bid price was in the previous 3-hour interval, so they have to guess at the bid price, position, etc., in that interval.

It is quite common for conversions to happen one or more days after an ad is clicked. For some of our clients, 25% or more of their conversions happen days or weeks after the last ad click. If the bid manager does not have the ability to recognize this, it will assume that conversions that occur today are from ads that get clicked on today. If this latency is not taken into account, then poor bidding decisions will be made since it may take some time before a keyword starts to generate conversions if the buying behavior involves consideration that delays the time to purchase.

Purchase Path

Almost all of the ABMs on the market today are focused on the last ad clicked and ignore that several ads may have been involved in the conversion. The team of ads that leads to a conversion is what is known as the Purchase Path^TM.

So if an ABM is unable to track and make bid decisions by looking beyond the last keyword click, it is making flawed bid decisions. It is allocating too much credit to the keyword at the end of the path and ignoring giving credit to other ads that made the conversion possible.

We often find that users will start their path by searching on a general term, then clicking on an ad that introduces them to a website. Later, the user will then search on that site’s branded term, click on the ad and convert. So, in this path, you would not want to give all credit to the last ad (the branded ad) because the user was introduced to the site by a different ad.

Offline Sales

Do you receive any of your orders over the phone? Is your ABM incorporating offline sales into its bidding strategies?

In order for an ABM to be most effective, it needs to track all of the conversions from your online ads, not just the conversions that occur online. If your business has offline orders and the ABM you use or are considering using does not account for them, your chances for improved performance will be greatly hampered.

Keywords that don’t receive enough clicks

Most PPC campaigns follow the 80/20 rule; 20% of your keywords are responsible for 80% of your conversions. The other 80% of your keywords are likely to be considered long tail keywords. What does the ABM do in the event there is not enough click data on a keyword to make a statistically sound decision? We know several ABMs say their tool groups ’similar’ keywords together in the event there are not enough clicks, so they optimize according to the group versus that one specific word.

How do they know which keywords to group? Is this really an effective strategy?

It may be if done with appropriate methods and care but if not, it may well not be an effective strategy. If you are looking to utilize an ABM that groups keywords together, you should try to get an understanding of how it decides which keywords to group. You should also see if you are given the ability to customize the groupings yourself.

Black box

The secret sauce behind many ABMs is its bid changing algorithms. Many ABMs keep their bid changing algorithms secret, hence the black box. They keep them secret for the same reason Coca-Cola doesn’t publish its recipe. If everyone knew exactly how it worked, then it would be easy to recreate. Are you comfortable having a technology make decisions about how your ad dollars are spent when you do not have a detailed, comprehensive understanding on how it makes its decisions? In addition, if these algorithms are not based on accurate metrics (latency, purchase path and profit), is the secret sauce useful or effective?

Don’t accurately solve for profit

Any business optimization should do one thing – increase profit. If an ABM is focused on any other metric outside of profit, you have no guarantee that your ultimate goal will be achieved.

Usually CEOs are not going to applaud their marketing team for hitting CPA and ROI goals if profit goals are clearly compromised in the process. Most CEOs would almost certainly applaud their marketing team if their profit levels were increased substantially even though they had a higher CPA or lower ROI than was originally desired. Ask yourself this question, ‘Would I be happier if I have a 100% ROI on profit of $1,000 or having a 10% ROI on profit of $100,000?’ Profit is king.

There are many potential issues that must be carefully considered when using ABMs. If properly implemented and not used blindly, an ABM can produce reasonable results, but they are not going to solve every problem with your online campaigns. If you do not have time in your day to make bid changes, then perhaps an ABM can do better than you are able to today. However, bid strategy is just one component to your success. You need to also focus on components, such as landing pages to increase conversions, increase average order size and getting customers to repeat, and creating new keywords and campaigns.

Success across all of the important elements of online marketing can never be accomplished solely by an ABM in isolation. Using an ABM to manage some of your lower impact, long tail keywords while using a more interactive bid management tool to manage your high value keyword set probably is the best way to leverage the productivity gains of an ABM, while not losing the benefit of an experienced, knowledgeable search marketing professional.

There are many other factors that need to be considered when making bid changes that most ABMs do not consider today, but a knowledgeable search marketing professional can. Things like lifetime value, competition, offline media, the economy, and seasonality should be considered as part of your overall bidding strategies.

This entry was posted on Monday, January 26th, 2009 at 10:15 am and is filed under All Blogs, News, PPC, What's New?. 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.