How paid search bid prices are connected to conversion rates.
A Web site's conversion rate is inextricably tied to the success and return on investment (ROI) of a company's pay-per-click (PPC) advertising campaign. The more paid search bid prices increase, the more critical a site's conversion rate becomes to simply remain in the game.
In the past year or so, we've noticed increases as high as 400 percent in the average position-one bid price in some online marketplaces. In some cases, campaigns that started in November 2003 with average bids of $1 were at $4 by August 2004. If this trend continues, a conversion enhancement strategy will be a necessity, not a luxury.
There are three PPC advertising challenges related to low conversion rates:
-- If you're currently engaged in paid search advertising and the keyword price in the vertical market increases, your site's current conversion rate may not support the higher bids necessary to stay in the game.
-- Bid prices on a keyword set in your vertical market may continue to rise. If you're not currently engaged in PPC, when you finally decide to jump in, you'll already be priced out of the market.
-- If either of these scenarios apply to you, you'll need the knowledge and a strategy to increase conversion rates in an effective way.
Let's look at an example of an online retailer's Web site conversion rate, and its relation to the PPC advertising bids.
Retailer X sells dress shirts online at $300 each (nice shirts!). Assuming a 10 percent profit margin, he earns $30 per shirt. His Web site's conversion rate is typical of online retailers
today -- roughly 2 percent (according to Shop.org). http://nl.internet.com/ct.html?rtr=on&s=1,1mbc,1,jnvv,a0eg,4fjm,5cpf
For every 1,000 visitors, Retailer X sells 20 shirts for $6,000.
He earns $600 in profit from those sales.
By dividing the $600 profit by the 1,000 visitors, we know the breakeven bid is $0.60. So Retailer X's average CPC http://nl.internet.com/ct.html?rtr=on&s=1,1mbc,1,39q4,5x9l,4fjm,5cpf on Yahoo! Search Marketing (formerly Overture) or Google AdWords must be $0.60 or less.
Another way of looking at this is by cost of customer acquisition. In this example, the 1,000 visitors at $0.60 CPC (define) cost $600. Divide the cost of the campaign by the number of acquisitions (20). The cost per action (CPA) is $30.
Retailer X's overall PPC advertising campaign must be played under the $0.60 bid ceiling. The higher the bids get, the less of the audience the retailer can reach.
Trouble is, many important keywords already show bid prices over a dollar. Yahoo!'s bid price tool http://nl.internet.com/ct.html?rtr=on&s=1,1mbc,1,k5av,18w8,4fjm,5cpf
shows "dress shirt" sells for $1.13 in position one, and positions two through four cost more than a dollar each (at time of writing).
So far, on some rather obvious keyword targets, Retailer X is out of the game before he even starts.
But this example is based on a 2 percent conversion rate. What would happen if Retailer X could increase the conversion rate to 4 percent, or 10 percent? Obviously, he could increase his bids. At a 4 percent conversion rate, he can support a $1.20 bid and his CPA drops from
$30 to $15. Suddenly, Retailer X can compete for the top spots again.
At 8 to 10 percent conversion rate, the PPC advertising campaign becomes extremely profitable. Improving the site's conversion rate is the key to Retailer X remaining competitive in paid search advertising.
With bid prices in some markets increasing quickly, companies that haven't yet launched PPC advertising campaigns are taking a serious risk. Bid prices could increase to a point where, by the time Retailer X starts experimenting with search advertising, it will be too costly to learn. It'll write off the medium altogether due to poor results and a seemingly insurmountable conversion rate deficit.
Worse, chances are Retailer X's competitors are already engaged in PPC advertising and working to improve their site's conversion rates. When Retailer X gets in the game, competitors' head start may provide them with a strong advantage.
There are exceptions to the rule: customer lifetime value, daypart bidding, conversion rate in various positions, and so on. But exceptions don't define the rules. A relationship exists
between bid price and conversion rate. That's beyond debate, regardless of the simplified example presented.
The importance of improving your site's conversion rate cannot be overstated. Don't wait until PPC advertising prices become prohibitively expensive to focus on increasing conversion rates.
Marketers who are engaged in a formal conversion enhancement process have increased in their Web sites' conversion rates, sometimes dramatically (a 2 percent conversion rate increasing to 22 percent in at least one case). Conversion rate improvements are achievable if you commit to the process. If bid prices continue to rise, more marketers will be increasingly be forced into making that commitment.
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