SEM bidding and traffic increase nonlinearity

Posted by Josh on Friday, December 11th, 2009.

Even PPC campaigns that have an Impression Share (IS) of nearly 100% can get more traffic by increasing bids. What happens when you do so? Will doubling bids result in twice the traffic? No, and here’s why.

If you increase your bids, your ads will show up higher and will get both more impressions and higher CTR as a result. By increasing bids, you’ve also increased your CPC, so now each click consumes a larger percentage of your budget. Let’s see what this means with an example:

Suppose your spend $5000 per month on Google AdWords with a $1 CPC, and that you’re consuming this budget on your current keyword set with 95% IS. In summary:

Budget: $5,000
CPC: $1
Clicks: 5000 ($5,000 divided by $1)

The high IS means that there is little be gained by increasing your budget alone, almost everyone is already seeing your advertising, so the extra budget won’t have an effect. We need to increase bids and the budget together. Let’s double the budget and increase our bids enough so that our IS is again 95%. This might require a CPC of $1.25. Now we have the following:

Budget: $10,000
CPC: $1.25
Clicks: 8,000 ($10,000 divided by $1.25)

Note that we have doubled our spending but not clicks. Indeed, clicks have gone up 60% instead of 100%. What if it takes a bigger increase in bids and CPC to consume the new budget of $10,000? Let’s look at $1.50.

Budget: $10,000
CPC: $1.50
Clicks: 6,667

Now our doubling of budget only increased clicks by 33%!

Here’s what we need to take away from this: increased performance is less than increase in budget for high impression share campaigns. Note also that we don’t usually know how much of an increase we can get without testing because the rate of improvement in ad position and CTR for a given bid increase is not the same for all keywords. You have to test it.