Bidding & Optimization Strategies for the Modern Search Marketer
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As search marketers, we spend a lot of time analyzing crazy SEO algorithms (hello, Panda and Penguin) and constantly trying to reverse-engineer ranking factors in an attempt to increase our organic rankings.
…spending just 20 minutes every week on PPC over a quarter would put you in the top 1% of most active advertisers!
Yet when it comes to paid search, there’s not nearly as much research, despite the fact that PPC, like SEO, is largely driven by an algorithm (Quality Score) which determines ad position, cost per click and many other factors.
By understanding how Quality Score works, AdWords can be cracked.
In this post, I’ll quantify the impact of Quality Score on your cost per click and cost per conversion. I’ll also explain to you (mathematically!) how Google calculates your Quality Score. Finally, I’ll share my three best tips on how to raise your Quality Scores, all in an effort to help you hack AdWords to improve your ROI.
Warning – lots of data ahead. Let‘s begin!
How Quality Score Impacts Ad Position
Quality Score is how Google grades the relevancy of keywords and ads in your AdWords account. It’s reported on a scale of 1-10, from awful to amazing.
Why does Google care about ad quality? It’s obviously in no one’s best interests to show irrelevant ads that don’t appeal to users in the SERPs and throughout their network. Google only gets paid if people click on your ads, so they favor ads that people are likely to click. It’s that simple.
This means that bidding higher doesn’t always result in a higher position, because Max Bid is only part of the equation. Ads are ranked using “Ad Rank,” which is mostly the product of Max Bid * Quality Score (plus some other factors).
In the following figure, notice how Advertiser 1 can get the top ad spot on the SERP, even though his Max CPC Bid—at $2—is lower than Advertiser 2’s Max Bid of $4.
Key Takeaway: Quality Score greatly impacts ad exposure. In fact, Google doesn’t even bother showing ads with low Quality Scores.
How Quality Score Impacts CPC
Quality Score also plays a very important role in determining how much you‘re charged per click. A now famous video by Hal Varian, Google’s Chief Economist, helped clarify this point. Your cost per click is calculated using the formula: [Ad Rank of the ad below yours / your Quality Score] + $0.01. Here’s an example of how this works:
Key Takeaway: The higher your Quality Score, the greater your CPC discount. Conversely, lower Quality Scores result in much higher costs per click. Consider this a CPC tax for running dumb ads.
What Is A Good Quality Score?
If you’re getting perfect 10s on all of your keyword Quality Scores, let me know, because I’ve yet to see this in any account. Typically, you’ll get a mix. I analyzed a few hundred accounts to figure out what the typical Quality Score distribution looks like in 2013 and found that 7 is the most prevalent score.
Note that the impression-weighted Quality Score here for the average AdWords account is around 5/10. Using this information, along with some basic arithmetic and the formula for calculating CPC, we can compute the economic value of having an above average Quality Score (or the penalty of having one below average).
Given that the average Quality Score is 5/10, the value of having a Quality Score of 10 is a discount of 50% on your CPC. The penalty of having a below average Quality Score of 1/10 is that your CPC is increased by 400%, on average. I’ve also included the marginal savings or cost increases for a 1-point increase or decrease in Quality Score.
It’s also worth noting that over the last 5 years, the average Quality Score has drifted lower. In 2009, the average Quality Score was 7/10. Today, it’s just 5/10. As a result, above average Quality Scores are worth much more than they were in the past!
Impact Of Quality Score On Cost Per Acquisition
Most people doing PPC advertising are doing either e-commerce or lead generation/direct response marketing – they usually care more about cost per conversion or acquisition (CPA) than cost per click. After all, if you can turn a greater profit with a higher volume of clicks at $50 per click than $20, it makes sense.
To quantify the relationship between CPA and Quality Score, we manually compiled CPA data from several hundred WordStream client accounts, representing about $100 million in annualized spend.
We then plotted the average cost-per-acquisition (conversion) versus the impression-weighted Quality Score for each campaign. Here’s what it looked like:
The data reveals that there is a very strong relationship between average cost per conversion and average Quality Score. The higher your Quality Score, the lower your CPA will be, on average.