Is Your Bid Op Tool Worth The Cost?

By Paul Benson
Thousands of online advertisers in the U.S. rely on bid optimization tools (BOTs) to make their paid search campaigns more efficient.  These software “solutions” or “platforms” which typically leverage rule-based or algorithmic bidding, claim the upper hand against manual bidding strategies.  While it’s certainly true that in some cases these tools vastly outperform manual bidding, the challenge for advertisers is determining whether a BOT will prove cost-effective for their particular campaigns.

BOTs are perceived as superior to manual bidding because they are able to leverage historical data and automatically update bids based on the day of week, time of day, and other factors.  They also save time as advertisers no longer need to analyze performance and make bid changes on a relatively routine basis.  Unfortunately, just as BOTs create many efficiencies, they also generate significant costs.

On average, advertisers pay 5% of spend for BOTs.  For an advertiser spending $100,000 a month, this equates to $60,000 per year.  Some providers also charge a one-time implementation or launch fee up to $10,000.  At this cost, a company could hire a new specialist simply to handle bidding for the account..  It is also true that BOTs require integration with existing platforms, which may cause on-going frustration among advertisers looking for a truly “automated” solution.  This frustration is intensified when advertisers learn that BOTs will require consistent manual oversight, and sometimes intervention.  On a past account audit it was determined that the advertiser’s automated tool had spent nearly $6,000 in two months on a single keyword that generated an ROAS of just 27% (significantly below the ROAS goal).  Neither the tool, nor the keyword, was a new addition to the campaign, which made this gross oversight on the part of the BOT even more perplexing.

For this same advertiser, we noticed over the course of several days that only 4% of converting terms, on average, received a daily bid change, and 88% of converting keywords didn’t receive a single bid change throughout the monitored time period.  Furthermore, keywords that comprised nearly 80% of all conversions were displayed in a position of 1.7 or better.  Nearly 94% of these terms had a CPA at or below goal, signifying that little optimization could be done from a bidding standpoint to improve performance on these terms.  After analyzing the number of bid changes, and the size of each bid change, it was concluded that this particular bid tool saved the client between $500 and $1,000 per month; the bid tool alone cost more than four times that amount to run.
Innovations within the primary advertising platforms, AdWords and AdCenter, make manual bidding all the more attractive.   For example, marketers formerly relied on BOTs to factor in day of week and time of day when making bid changes.  However, now Google AdWords’ Ad Scheduling functionality allows advertisers to adjust bids (up or down) during specified days or times of day.  AdWords also gives insight into performance by time of day or day of week (as long as you have a Google Conversion Pixel in place).  As a result, advertisers can leverage day parting to effectively change bids by time of day and day of week, just like a BOT can.  All of this functionality is available for free directly within the AdWords interface; you don’t need to access, pay for, or become familiar with a 3rd party interface.

Despite the aforementioned challenges, there are certainly scenarios where a BOT is still a valuable and unrivaled tool.  Ultimately, the decision to implement a BOT should be evaluated on a case by case basis.  Fortunately, there are three criteria that will help point you in the right direction.  First and foremost, consider your industry.  Advertisers in the retail space, especially those with thousands of SKUs, are more likely to benefit from a BOT.  This is true simply because a BOT’s value increases as the number of keywords increases.  Sophisticated BOTS can accurately determine the right CPC based on not only historical performance of a particular keyword, but also on historical performance of related keywords.  This insight, although small on an individual keyword basis, can add up to thousands of dollars across an account.

The second consideration can be referred to as the PPC Gini Coefficient.  A variant from its economic definition, the PPC Gini Coefficient can be calculated by dividing the number of converting keywords that are meeting or exceeding your goal and are in an average position better than 2 (1.9, 1.8, etc.) by the number of total converting keywords.  The higher your PPC Gini coefficient, the less opportunity there is for bid optimizations, and therefore the less useful a BOT will be.  A coefficient of 70% is considered high, while 50% is considered relatively normal.  It’s possible that your campaigns contain keywords that are exceeding your goal, but are in a position below 2 (2.1, 2.2, etc.) simply because the CPCs haven’t been properly adjusted.  If this is the case, these terms should be removed from the calculation.

Finally, if you’re currently using a BOT, you should also consider the frequency and size of bid changes.  This data, along with click volume, can give you a reasonable sense for how much money the BOT is saving you every month.  Keep in mind, however, that every time a BOT decreases a CPC to gain efficiency, it may be also sacrificing conversions.  It’s also important to understand whether the bid changes are more commonly max CPC increases or decreases.  Surprisingly, out of all the bid changes implemented for the advertiser mentioned earlier, 94% were decreases in max CPCs.  Therefore, in this particular case, only cost savings were considered; potential revenue generated from increased CPCs was ignored.

If you’re still struggling with the decision of whether to implement a BOT, consider contacting one of the providers to request an estimate.  Marin Software has an internal tool that estimates your increased ROAS if you were to adopt their software.  While these estimates are commonly ‘optimistic,’ this additional information may aid in your decision.  It’s difficult to test a BOT, since significant upfront work is required to integrate the software with your account.  Therefore, you should collaborate with an experienced SEM expert or agency to conduct a thorough analysis based on historical campaign performance.  If you’re already using a BOT, don’t fall victim to the sunk cost fallacy.  Carefully evaluating the efficacy of your bid tool could save you thousands.