Methods for optimising online campaigns evolve.
Some of us recall the days when the majority of advertisements were sold by reserving a time slot on a website.
The advertiser, for example, paid a monthly fee for a horizontal banner on the home page of a particular portal. There was very little room for improvement. How to Earn Money with AdSense: A Beginner’s Guide
CPM to Profit Maximisation
The first simple ad servers allowed for ad rotation as well as tracking of impressions, reach, and frequency. Advertisers began experimenting with CPM (cost per thousand impressions) optimisation.
However, because impressions were sometimes difficult to compare, particularly in the case of different ad sizes and positions, advertisers began to optimise the actual traffic delivered by the ads as well as their CPC (cost per click).
It soon became clear that traffic quality was also important.
What visitors do on the advertiser’s website and how many desired actions, such as purchases or signups (conversions), are generated by the traffic must be carefully monitored.
Conversion tracking systems enable CPA (cost per action) optimisation. Then, assigning a value to the conversion ushered in the ROI (return on investment) era, in which advertisers began to compare the actual income from acquired traffic to the cost of its acquisition.
However, ROI is not the solution.
Many advertising agencies present case studies with enormous ROI, but this is usually for a limited campaign and should be treated as an exception.
The online advertising market is highly efficient today. This means that the cost of advertising usually reflects its worth. True bargains are few and far between.
Marketers today face the age-old “margin or volume” quandary. Advertisers with limited budgets and volume expectations can begin with the cheapest placements and frequencies.
Increasing volume necessitates purchasing more and more expensive placements, as well as increasing frequency and ad position in search engine ads.
As a result, the ad’s efficiency (ROI) decreases as the volume increases.
The general rule is that big players do not buy cheaper, but this is not the case.
The higher the cost per impression, click, and conversion, the more intense the advertising.
The total profit (advertising income less campaign costs) initially rises, but the higher the volume, the slower the growth.
When the advertiser’s profits begin to decline, we say the advertiser has overinvested in the ads.\
The goal of advertising optimisation is to find the sweet spot of maximum profit between underinvestment and overinvestment.
The most advanced and ultimate goal of budget and bid management is profit-driven optimisation.
Price Flexibility
Price elasticity is a measure used in economics to show how demand or supply reacts to price changes. It is the percentage change in quantity demanded or supplied as a result of a 1% change in price.
If the supply is advertising traffic (clicks) and the price is cost per click (CPC), the elasticity measures how the traffic responds to a change in CPC (d stands for a small increase in value):
The higher the fraction value, the greater the elasticity. If the elasticity is less than one, the demand or supply is said to be inelastic.
Price elasticity measures how quickly the volume of clicks (and conversions) changes in response to a change in unit price (CPC or CPA).
Assume a campaign generates 1,000 clicks at $1 CPC, and after increasing the CPC to $.1.10 (+10%), the click volume increases to 1,200 (+20%). The elasticity in this case is relatively high and equals 2:
Another example: If increasing bids by 20% results in a 10% increase in click volume, the elasticity is 0.5.
In most cases, the price elasticity of online ads decreases with price. Increasing CPC (or CPM) bids increases volumes, but the relative growth becomes increasingly small.
Price elasticity (E) is a critical metric for SEM bid management.
The maximum profit point is where the ROI = 1/E, and increasing CPC bids makes sense only if the ROI > 1/E. Otherwise, bids should be reduced.
The price elasticity of Google Ads and other search engine advertising systems is primarily determined by the ad’s position.
High positions at the top of the page have very little elasticity.
If the average position of the ad is 1.3, it has a 99.9% impression share, and it appears at the top of the page 97% of the time, increasing the CPC bid has no effect on the number of clicks.
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