How Important is Bid Managment?

Posted on February 4, 2012

About a year ago the PPC blogosphere got about as close as it ever does to a flamewar when Craig Danuloff told readers of the Click Equations blog that bid management is dead. I’ve been thinking about the importance of bid management since then and now, after trying to explain to a client why I shouldn’t have to do a budget forecast, I feel I’ve got an opinion worth sharing.

Summary of the “Flamewar”

Everything started on the Click Equations blog with a post about the death of bid management. Craig’s main idea (dressed up with a very provocative title) is that too many accounts focus on bid management too early - people spend too much time/money on sophisticated bid management tools when there are other, more fundamental problems which should be fixed first.

The Rimm Kauffman Group couldn’t take this lying down so Mark Ballard was quick (same day!) to respond with the case for bid management in which he calls out Click Equations for being deliberately provocative and counters some of his points.

The argument went from thesis to counter-thesis to synthesis within a week after the publication of part ii on the Click Equations blog in which it was admitted that the title of the previous post was a little bit provocative and that bid management isn’t quite dead after all. Craig also promises future posts on the subject but I guess he is too busy catching up on all the Bob Dylan concerts his missed whilst writing the definitive guide to quality score.

My Thoughts

When forecasting PPC performance, I like to use the square root rule which says that revenue is directly proportional to the square root of advertising spend:

k is a constant which can be determined from the current state of the account (divide revenue by the square root of spend).

When graphed this gives something like the following: 

So revenue will always increase with rising spend but when the increasing spend is taken off the revenue figure the result has a maximum and eventually falls into loss. I call this line the “profit curve” and it is bid management which defines an accounts position on it.

Growing businesses or those who want to increase top line revenues (perhaps in the run up to an acquisition) try to position themselves as far to the right as possible which maximizes turnover and the number of customers acquired. 

Businesses trying to maximize profits right now try to position themselves at the peak of the profit curve which gives them the most revenue once advertising costs have been taken into account.

Correctly positioning an account on the profit curve requires accurate calculation of the expected profit per click and estimates of the max CPC bid which will deliver the optimal CPC given the expected profit. This is 100% the realm of the bid management specialist and their algorithms.

So how does all the other work that goes into optimizing a PPC account fit into this picture?

Everything else changes the value of k. Bid management changes your position on the profit curve, but changing your account structure or finding new keywords to bid on changes the shape of the curve.

So by improving the value of k the maximum potential profit for an account increases as does the revenue and customers that can be acquired without making a loss.

The point I’m trying to make here is not a particularly novel one: You have to get your bid management right, and you have to get everything else in place too. If you are so far off being in the right place on the profit curve then bid management should be the priority. If you are very near the peak but the account structure is a mess then you should focus on that next.

As with just about everything in online marketing “it depends”. But now you know that it depends on the potential for improvement in the value of k and on the accounts position on the profit curve.