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Steve Baker

Chief Analyst

Ask most people what the answer to this question is, and they&#146;ll reel off an answer like œfourth or œsecond, but I think it&#146;s fairly clear that the question is much more complex than that , after all, fourth place is going to be quite expensive on competitive terms, and if your site has a low conversion rate, you could easily lose money. On the other hand, if the term has few people bidding on it, then a higher position will only cost a few pence more and generate loads more conversions. And you can&#146;t really answer the question until you&#146;ve decided what your objective is , do you want to generate as many conversions as you can for your budget, generate as many conversions as you can given a maximum fixed cost per conversion, maximise your return on investment, maximise your profit, get the highest position that you can without throwing away money in order to raise brand awareness, or something else? And surely it has to depend on what your rivals are doing, doesn&#146;t it? Are the people above you serious competition, or just people with lots of money and no idea what they&#146;re doing? Are you trying to ˜beat&#146; these people, or make money? Clearly, a simple one word answer isn&#146;t quite going to cut it¦ Before answering the question, there are a number of general rules of thumb that can be applied to PPC adverts. <ol> <li>The higher your advert appears, the more clicks you will get (always true)</li> <li>The higher your advert appears, the more you pay per click (always true)</li> <li>The higher your advert appears, the lower your conversion rate will be (usually true)</li> </ol> Obviously, the text of your advert has an impact on all of these, but for the purposes of this blog, we&#146;ll assume that you have a single advert. Cost per conversion is generally a good measurement of the effectiveness of your campaign , it would be nice to analyse profit, or even a ratio of cost:demand, but unless you&#146;ve got the tools to do this, the best you are likely to get is cost per conversion. Cost per conversion can be calculated by dividing the cost per click by the conversion rate (conversions per click). Since we&#146;ve stated that higher positions have higher cost per click AND lower conversion rate, it must therefore be true that the higher your ad appears, the more you have to pay per conversion. So if your objective was to minimise the cost per conversion, or maximise your return on investment (which is pretty much the same thing if you don&#146;t know your conversion value), then the simple answer is that your advert should appear last! But that seems a bit silly, so perhaps this shouldn&#146;t be your objective after all¦ Clearly, it&#146;s better to make a &pound;1 from 100 people that to make a &pound;5 from one person. So, from a purely analytical perspective, maximising your ˜profit&#146; has to be the way forward. If you are advertising for other reasons, such as raising brand awareness, then you may be willing to make less profit, in order to be seen by more people , but even so, the rest of this document is still important, so don&#146;t leave yet! The problem with profit, as I&#146;ve already intimated, is that unless you know your margin and order value, you can&#146;t actually calculate it. And what if you are generating leads? They don&#146;t have a value or margin, do they? Well, you can&#146;t calculate it exactly, but you need some kind of idea what you will make from a conversion, or you&#146;ll never be able to tell what the ˜best&#146; position is. In a nutshell, how much can you pay for a conversion, and still break even? If you can&#146;t put a figure on this, you need to think hard about what you are actually trying to achieve with the campaign , it can&#146;t be to make money! I&#146;ll assume that you&#146;ve got a number , it doesn&#146;t need to be exact, even a ballpark figure will be adequate for identifying your sweet spot. What else do you need? Well, we&#146;ve said that the conversion rate increases as you move down the results, and that the clickthrough rate and cost per click fall. You need to put numbers to this. Something along the lines of: <table border="0" cellspacing="0" cellpadding="0"> <tbody> <tr> <th>Position</th> <th>Clickthru Rate</th> <th>Conversion Rate</th> <th>Cost/Click</th> </tr> <tr> <td>1</td> <td>10%</td> <td>1.0%</td> <td>&pound;1.50</td> </tr> <tr> <td>2</td> <td>8%</td> <td>1.2%</td> <td>&pound;1.30</td> </tr> <tr> <td>3</td> <td>6%</td> <td>1.4%</td> <td>&pound;1.10</td> </tr> <tr> <td>4</td> <td>4%</td> <td>1.6%</td> <td>&pound;1.00</td> </tr> <tr> <td>5</td> <td>2%</td> <td>1.7%</td> <td>&pound;0.90</td> </tr> </tbody></table> etc Don&#146;t use the numbers above, I&#146;ve just made them up, and they will be different for each campaign, and probably even each adgroup or even each keyword. Again, these will have to be estimates, but by looking at the performance of keywords over time you can get some idea. If you really get stuck, change your cost per clicks every day or two for a few weeks, and get estimates that way. Once you&#146;ve got this table, calculate the cost per conversion (by dividing the cost per click by the conversion rate). Subtract this from your approximate income per conversion (take into account the cost of the goods/services!), and you get the ˜profit&#146; per conversion. So for the above figures, with product that retails for &pound;150, with a cost to you of &pound;75, the results would be: <table border="0" cellspacing="0" cellpadding="0" width="100%"> <tbody> <tr> <th>Position</th> <th>Profit/Conversion</th> </tr> <tr> <td>1</td> <td>&pound;75 , (&pound;1.50/1.0%) = -&pound;75</td> </tr> <tr> <td>2</td> <td>&pound;75 , (&pound;1.30/1.2%) = -&pound;33</td> </tr> <tr> <td>3</td> <td>&pound;75 , (&pound;1.10/1.4%) = -&pound;4</td> </tr> <tr> <td>4</td> <td>&pound;75 , (&pound;1.00/1.6%) = &pound;13</td> </tr> <tr> <td>5</td> <td>&pound;75 , (&pound;0.90/1.7%) = &pound;22</td> </tr> </tbody></table> etc As mentioned earlier, this will always increase, as you move further down the rankings. It should also level out quite quickly , the cost per click for 11th and 20th are usually reasonably close together, and clickthrough rates won&#146;t vary too much either¦ Next, multiply this by the conversion rate (to get the profit per click) then the clickthrough rate. This will turn the profit per conversion into the profit per impression. Multiply this in turn by the impressions per day (or month or year) to get the profit over that period. Here, we&#146;ll assume 1000 impressions per day. <table border="0" cellspacing="0" cellpadding="0"> <tbody> <tr> <th>Position</th> <th>Profit/Impression</th> <th>Profit/Day</th> </tr> <tr> <td>1</td> <td>(-&pound;75*1.0%*10%) = -&pound;0.075</td> <td>-&pound;75.00</td> </tr> <tr> <td>2</td> <td>(-&pound;33*1.2%*8%) = -&pound;0.032</td> <td>-&pound;32.00</td> </tr> <tr> <td>3</td> <td>(-&pound;4*1.4%*6%) = -&pound;0.003</td> <td>-&pound;3.00</td> </tr> <tr> <td>4</td> <td>(&pound;13*1.6%*4%) = &pound;0.008</td> <td>&pound;8.00</td> </tr> <tr> <td>5</td> <td>(&pound;22*1.7%*2%) = &pound;0.0075</td> <td>&pound;7.50</td> </tr> </tbody></table> You can multiply this by the number of impressions, in order to get a daily profit/loss for each position if you like, but in terms of finding the sweet spot, this isn&#146;t really necessary. So, in the above example, the sweet spot is 4th, though any position below fourth will also show a small profit (as the income for each unit sold will always be more than the cost below this point). Is all this work worth it? Perhaps not, if you are in fourth position, and haven&#146;t got the budget to move into first or second , but the general rule is very useful. If you lower your bid, you&#146;ll get fewer conversions, but each one will cost less, and if you raise it, you&#146;ll get more conversions, but each one will cost a bit more. What you will find, is that there are few situations where the top position is the most profitable , even if your site converts better than your competitors, your advert has a better clickthrough rate, and your margin on sales and average order value are better, you are still relying on them to do the same calculations that you have , otherwise they could be bidding over the odds, and competing with them just means that you lose money, they lose money and Google gets richer!

Ask most people what the answer to this question is, and they’ll reel off an answer like œfourth or œsecond, but I think it’s fairly clear that the question is much more complex than that , after all, fourth place is going to be quite expensive on competitive terms, and if your site has a low conversion rate, you could easily lose money. On the other hand, if the term has few people bidding on it, then a higher position will only cost a few pence more and generate loads more conversions. And you can’t really answer the question until you’ve decided what your objective is , do you want to generate as many conversions as you can for your budget, generate as many conversions as you can given a maximum fixed cost per conversion, maximise your return on investment, maximise your profit, get the highest position that you can without throwing away money in order to raise brand awareness, or something else? And surely it has to depend on what your rivals are doing, doesn’t it? Are the people above you serious competition, or just people with lots of money and no idea what they’re doing? Are you trying to ˜beat’ these people, or make money? Clearly, a simple one word answer isn’t quite going to cut it¦ Before answering the question, there are a number of general rules of thumb that can be applied to PPC adverts.

  1. The higher your advert appears, the more clicks you will get (always true)
  2. The higher your advert appears, the more you pay per click (always true)
  3. The higher your advert appears, the lower your conversion rate will be (usually true)

Obviously, the text of your advert has an impact on all of these, but for the purposes of this blog, we’ll assume that you have a single advert. Cost per conversion is generally a good measurement of the effectiveness of your campaign , it would be nice to analyse profit, or even a ratio of cost:demand, but unless you’ve got the tools to do this, the best you are likely to get is cost per conversion. Cost per conversion can be calculated by dividing the cost per click by the conversion rate (conversions per click). Since we’ve stated that higher positions have higher cost per click AND lower conversion rate, it must therefore be true that the higher your ad appears, the more you have to pay per conversion. So if your objective was to minimise the cost per conversion, or maximise your return on investment (which is pretty much the same thing if you don’t know your conversion value), then the simple answer is that your advert should appear last! But that seems a bit silly, so perhaps this shouldn’t be your objective after all¦ Clearly, it’s better to make a £1 from 100 people that to make a £5 from one person. So, from a purely analytical perspective, maximising your ˜profit’ has to be the way forward. If you are advertising for other reasons, such as raising brand awareness, then you may be willing to make less profit, in order to be seen by more people , but even so, the rest of this document is still important, so don’t leave yet! The problem with profit, as I’ve already intimated, is that unless you know your margin and order value, you can’t actually calculate it. And what if you are generating leads? They don’t have a value or margin, do they? Well, you can’t calculate it exactly, but you need some kind of idea what you will make from a conversion, or you’ll never be able to tell what the ˜best’ position is. In a nutshell, how much can you pay for a conversion, and still break even? If you can’t put a figure on this, you need to think hard about what you are actually trying to achieve with the campaign , it can’t be to make money! I’ll assume that you’ve got a number , it doesn’t need to be exact, even a ballpark figure will be adequate for identifying your sweet spot. What else do you need? Well, we’ve said that the conversion rate increases as you move down the results, and that the clickthrough rate and cost per click fall. You need to put numbers to this. Something along the lines of:

PositionClickthru RateConversion RateCost/Click
1 10% 1.0% £1.50
2 8% 1.2% £1.30
3 6% 1.4% £1.10
4 4% 1.6% £1.00
5 2% 1.7% £0.90

etc Don’t use the numbers above, I’ve just made them up, and they will be different for each campaign, and probably even each adgroup or even each keyword. Again, these will have to be estimates, but by looking at the performance of keywords over time you can get some idea. If you really get stuck, change your cost per clicks every day or two for a few weeks, and get estimates that way. Once you’ve got this table, calculate the cost per conversion (by dividing the cost per click by the conversion rate). Subtract this from your approximate income per conversion (take into account the cost of the goods/services!), and you get the ˜profit’ per conversion. So for the above figures, with product that retails for £150, with a cost to you of £75, the results would be:

PositionProfit/Conversion
1 £75 , (£1.50/1.0%) = -£75
2 £75 , (£1.30/1.2%) = -£33
3 £75 , (£1.10/1.4%) = -£4
4 £75 , (£1.00/1.6%) = £13
5 £75 , (£0.90/1.7%) = £22

etc As mentioned earlier, this will always increase, as you move further down the rankings. It should also level out quite quickly , the cost per click for 11th and 20th are usually reasonably close together, and clickthrough rates won’t vary too much either¦ Next, multiply this by the conversion rate (to get the profit per click) then the clickthrough rate. This will turn the profit per conversion into the profit per impression. Multiply this in turn by the impressions per day (or month or year) to get the profit over that period. Here, we’ll assume 1000 impressions per day.

PositionProfit/ImpressionProfit/Day
1 (-£75*1.0%*10%) = -£0.075 -£75.00
2 (-£33*1.2%*8%) = -£0.032 -£32.00
3 (-£4*1.4%*6%) = -£0.003 -£3.00
4 (£13*1.6%*4%) = £0.008 £8.00
5 (£22*1.7%*2%) = £0.0075 £7.50

You can multiply this by the number of impressions, in order to get a daily profit/loss for each position if you like, but in terms of finding the sweet spot, this isn’t really necessary. So, in the above example, the sweet spot is 4th, though any position below fourth will also show a small profit (as the income for each unit sold will always be more than the cost below this point). Is all this work worth it? Perhaps not, if you are in fourth position, and haven’t got the budget to move into first or second , but the general rule is very useful. If you lower your bid, you’ll get fewer conversions, but each one will cost less, and if you raise it, you’ll get more conversions, but each one will cost a bit more. What you will find, is that there are few situations where the top position is the most profitable , even if your site converts better than your competitors, your advert has a better clickthrough rate, and your margin on sales and average order value are better, you are still relying on them to do the same calculations that you have , otherwise they could be bidding over the odds, and competing with them just means that you lose money, they lose money and Google gets richer!