For newbies to paid search advertising, entering this competitive auction-based marketplace for keyword ads for the first time can be a little bit daunting. It’s even a bit of a rude awakening for some experienced advertisers who re-enter the scene after a hiatus (much like me trying to write this article right after Christmas, still groggy from rack of lamb and pumpkin cheesecake).

After all, half a million advertisers have arrived before you (hopefully not all bidding on your keywords!). It’s a competitive space that requires know-how and meticulous testing.

In paid search, you have to do well relative to other economic maximizers who want the same customers as you do. That’s what makes it so tough. I’ll start by reviewing how the Google paid search algorithm has evolved, and then talk about ways you can gain advantages over lazier or less creative advertisers.

Paid Search 1.0
Before paid search was invented, there used to be a pretty simple version of this story. If you were after organic search visibility, then a high rank on a popular search query was a good thing. Hey, it didn’t cost anything!

The invention of the straight paid search auction–the more you bid, the higher you appeared on the page–made things tougher, especially as keyword costs rose. It’s worth harkening back to those days to remind ourselves that the paid search auction introduced a whole new level of complexity to the question of “how your search campaign was doing.” Now, you were risking your money, just like those traditional print and broadcast advertisers had been all along. It was time to grow up!

In search marketing, because the keyword is the form of targeting being fought over, and a click is what you pay for, the playing field becomes distinctly unequal among businesses of different sizes (and marketers of different skill levels) competing for visibility on the same keywords. If you need to pay $5 for a click and you sell a low-margin product, you are, for all intents and purposes, blocked from advertising on that keyword. Veteran advertisers have been feeling the impact of click inflation for some time.

B2B is Both Scary and Promising
The quasi-Darwinian logic that threatens to make some kinds of ads extinct doesn’t begin and end with profit margins. Advertisers with higher lifetime customer values or stronger overall business models are willing to pay more (and thus bid higher) to acquire a customer.

For B2B advertisers, this is something of a positive, because they deal in long-sales-cycle, high-margin lead generation campaigns that may be worth those high CPC’s. This type of advertiser won’t be pushed out of the game easily. But do brace yourself for high costs on some keywords, as your competitors anticipate the same potentially high value customer wins as you do. The key is of course to measure ROI, not just costs. If you already know you’re comfortable with an $80 cost per lead and an $800 cost per new customer, you can gauge your performance accordingly.

Depending on what you offer, a fixed notion of what your “business is” is always dangerous, just as it’s a mistake to believe that getting the “bids right” or the “keyword list built” or the “ads written” is going to be enough to succeed in a tough auction. These things are a good start, but as competition grows, you’ll need to optimize other aspects of your marketing-to the extreme, perhaps, of changing your product emphasis, pricing, or even your whole business model.

AdWords 2.5 and Yahoo Panama: Complexity as Opportunity
Fortunately, the newer-generation ad auctions (Google AdWords 2.5 and Yahoo Panama) give you a fair shot at outsmarting your competitors by simply being diligent with your campaign organization and testing at a relatively surface level. By running smart campaigns that rank higher on ad quality measures, which include click through rates, keyword relevancy in relation to ads and landing pages, etc., the diligent advertiser can often climb into higher ad positions at a reasonable cost.

Moreover, the advertiser who tests meticulously can discover ads that actually convert visitors to sales at a better rate, either by filtering some unwanted clicks through clarity of ad copy, or by injecting subtle psychological cues into the process.

You won’t get a great sense of whether your keywords’ click through rates are “good enough” for the Google AdWords ranking algorithm just by looking at them in absolute terms. It’s relative to industry norms. That’s why sometimes your quality score is “Excellent” even with a CTR below 1.0%. And in other cases it’s “Poor” above 2%.

After the Click
We’re not done yet. Conversion improvement experts like Bryan Eisenberg have long believed that it’s the website itself that is often the weakest link in your economic chain. Your paid search campaign economics can improve dramatically if you meticulously plan and test your user’s experience post-click, to the point where (let’s say) the same set of clicks converts at double or triple the rate.

Again, your business model can dictate the extent of your testing strategy. In fast-moving retail, it’s worth investing in site design, and at an appropriate time, multivariate testing of both your ad copy and your landing pages. This is made possible by the fact that high sales volumes will give you statistically significant data within a reasonable time frame, even with a high number of page permutations (say, 24) in a multivariate test.

In B2B, you typically need to make more arbitrary decisions in your testing process. Due to the slow rate of conversions, you might take months to conclude a simple A/B test on a page, or to pick the winner out of four or six different ads.

You can do a little bit to accelerate your user response testing by looking for secondary expressions of interest on your website that stop short of a conversion to a sale or lead. Maybe there is a certain page on the site that is visited frequently by some folks who are just browsing, but are slightly more serious than the visitors who come and leave quickly. You could set that page as a goal in Google Analytics, Google Conversion Tracker, or a third-party analytics package for the purpose of ad testing, so you could reach statistically significant conclusions faster.

Beware, though, of over-interpreting data. “Lumpy” sales patterns and the unpredictability of events and interactions mean that you want to be certain in your tests. Don’t assume slight variations in performance are meaningful.

Back to bidding basics (and then beyond)
Let’s talk bids. Short-term, you’ll see all kinds of bold behavior by competitors in the auction. Sometimes, you’re lucky enough to be sitting in relatively uncompetitive spaces. Other factors being equal, the only way you can win long term is if comparable competitors are either too bold or too timid in their bidding on many of the keywords you’re scrapping over.

If everyone else is bidding too little or have yet to enter the auction, then your most rational course of action (assuming a sound campaign in the first place) is to increase your company’s annual paid search budget as high as management will permit, to make hay while the sun shines. I suppose it’s “good enough” to give your competitors a fighting chance to catch you by deferring your plans to grow market share, but if you’re a ruthless type, you should lobby your organization to increase its overall click budget.

If you think bid management still means “turning off the nonperforming keywords” as it did in 2002, then you’re behind the times. If your targets aren’t being met, is the answer to “nibble” in 12th ad position, basically giving up on the idea of entering the auction in earnest, or is it to address fundamentals or subtleties that you may be missing? Throw in the towel only when absolutely necessary. Bidding very low is a form of quiet surrender in this war.

2008: A Slam-Dunk Prediction
As more of the world’s “real” businesses move into the paid search space, the bounteous primordial wetland of low bids and clueless, semi-literate competitors will dry up. “Lifestyle”-based business models, such as click arbitrage, will be available to fewer and fewer players.

This prediction has very little to do with editorial rules and quality-based bidding formulas; it has much more to the inevitable laws of supply and demand. If you’re thinking about career options and wardrobe choices, try 2008-era business casual. Increase the seriousness level of your campaign strategy, confident that aberrations and anomalies in the auction have been largely weeded out by new rules, as well as laws of supply and demand, that make it tougher on the dabblers.

About the Author: Andrew Goodman has become a leading global authority on search engine advertising. Andrew launched Page Zero, in 2000 as a company devoted to thinking about online content, portals, business models and the rise of search as a marketing channel.

This entry was posted on Thursday, January 17th, 2008 at 5:23 pm and is filed under Marketing. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.