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What about Your Competitors Bids
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You calculated your key performance indicators (KPIs) and you know that the maximum profitable CPA for your product is $17.25. Yet some competitors rank higher. Are they outbidding you What s going on Very likely, they have high Quality Scores. If you improve your keywords, ads, and landing pages, your Quality Score will go up and your ads will rank higher.
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A few competitors may have irrationally high bids. In general, most competitors tend to bid too low because they don t calculate their KPIs. For example, $3 for a click sounds high, so they won t bid $3. Because you ve calculated the CPL and CPA, you know that you can afford a higher bid. It may sound odd, but it s not good business to bid too low. The advertiser misses out on opportunities to make more sales, and the few sales only cover the basic costs (rent, salaries, supplies, and so on), which means less money to invest in growing the business. Other competitors may bid too high. Google lets you bid up to $100 for a keyword. If they haven t calculated their maximum profitable CPA, they are losing money in their campaign. Don t worry about them. After a few months, they ll blog that Google doesn t work and they ll quit.
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You bid for a keyword, but what you actually pay is a different amount. Sometimes, it s very different. The actual amount you ll pay depends on your ad group s Quality Score and the bids from other advertisers. By understanding this, you can reduce the amount you pay and get more clicks for the same budget. First, let s review the formula for calculating the CPC, which is what you actually pay when someone clicks your ad. This formula includes an Ad Rank score, which is your bid multiplied by your keyword s Quality Score (QS). The CPC is your QS divided by the next-lowest ad s Ad Rank, plus 1 . Let s use an example to explain this formula. Let s say there are only three companies using AdWords in the koi market. Apricot bids $2, Berry bids $5, and Cherry bids $1. Laura clicks on all three ads. What does each company pay for these clicks The following table shows the bid, the Quality Score, the Ad Rank, and the CPC. It also explains how the ads were ranked and what the advertisers paid.
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Their Bid $2.00 Quality Score (QS) 40 Ad Rank Value 80 What They Pay (CPC) $0.27
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Company Apricot
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Why They Pay That Amount Multiply the bid ($2) by the QS (QS 40) to get the Ad Rank (80). Apricot s QS (40) divided by Berry s Ad Rank (15), plus 1 means Apricot pays $0.27. Multiply the bid ($5) by the QS (QS 3) to get the Ad Rank (15). Berry s QS (3) is divided by Cherry s Ad Rank (2), plus 1 , so Berry pays $1.51. The min bid is 5 , so Cherry pays 5 .
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Berry
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$5.00
$1.51
Cherry
$1.00
$0.05
Search Engine Marketing
Apricot bids $2 but ranks higher than Berry, who bid $5, because Apricot has a much better Quality Score (40). He also pays only $0.27 instead of his $2 bid. Berry is number two yet pays more ($1.51) than number one (who pays only $0.27). If the three advertisers each have a $200 daily budget, Apricot will get 741 clicks ($200 divided by $0.27 = 741 clicks), but Berry will get only 132 clicks ($200 divided by $1.51 = 132 clicks), even though he is bidding more than twice per click. If we assume both have the same conversion rate, Apricot is bidding less than Berry but he will sell five times as many koi. Because the Quality Score is based on a number of factors, it may be higher than 40 points. Let s see how Quality Scores are calculated.
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