How Does Bid Management Work in PPC Marketing

A subscriber asked an interesting question,

“How does bid management work in Pay-Per-Click Marketing?”

“Bid” is a term used to describe how advertising is paid for on Pay-Per-Click (PPC) platforms.
I’ll quickly review with you how the pricing model work, the automatic budgeting functionality available to advertisers, and finally automatic bid management. Feel free to skip ahead if you don’t need the review.

PPC Platforms

PPC has gained popularity over the last 10 years or so as a standard advertising model online.
Some examples of PPC engines are:

  • Google Adwords,
  • Microsoft Bing’s Adcenter,
  • Yahoo SEM,
  • Youtube Sponsored videos,
  • Facebook Sponsored Ads,
  • and LinkedIN Sponsored Ads

Each of these platforms has four integral features in order to be classed as a PPC platform:

  1. Segmentation of the engine’s audience
  2. Ads are displayed free to the selected audience
  3. Ads are ranked in order of some competitive criteria (eg, relevance, bid, click-thru-rate)
  4. Charges are accumulated and billed when an ad is clicked

Note that CPM (Cost Per 1,000 impressions) is a different bidding model also supported on PPC platforms, but it is also outside the scope of this article.
With that said, let’s explore each feature in turn.

Audience Segmentation

PPC platforms typically have a large audience of their own they allow advertisers to gain access to.
In order to get the most out of your advertising, it is in your best interest to select a subset of the audience who you want to see your ads.
No ad is guaranteed to be displayed to ALL the people in the subset of the platform’s audience. So you must choose a subset you believe are likely to be interested in your offer.
PPC Engines give the facility to filter their audience using data they have on hand.
Each platform differs in how its audience are segmented, based on the data they collect about them. Facebook, for example, collects demographic information about their users (eg, age, gender, location), likes, interests, and connections.
LinkedIN, on the other hand, allows you to target their audience based on employment, job title, and sector of industry.
Google Adwords lets you choose audience based on keywords in text people are reading or words they are searching.

Ad Impressions Are Free

Every time your ad is displayed to a member of the audience you target, it is called an “impression”.

You can configure a PPC campaign to show different ads to as many sub-groups of the platform’s audience as you like.
Ads are usually displayed on individual pages the PPC platform owns or has access to.
On Google, ads may be seen in Search Engine results, either at the top of results, on the right, or at the very bottom. Also, because Google has access to a large network of blogs, articles, videos, and other 3rd party websites that display Google-owned Adsense blocks, your ads might be displayed around relevant content across the web. Furthermore, advertisers have the ability to segment by network or website the audience who qualify to see their ads!
Facebook and LinkedIN display ads on the right of their user’s profiles and status updates.
YouTube, on the other hand, displays ads in YouTube search results as well as at the end of videos.
Regardless of the chosen PPC platform, impressions are counted every time your ad is displayed. However, you are never billed when your ad is seen by your selected audience. Instead, you only pay when your ad gains interest that results in a click-through to your website.
This is beneficial to advertisers with small budgets, who only want to pay only for visitors likely to buy from them.
In all cases, an impression count is maintained and visible to you so that both the advertiser and PPC Engine can tell how effective the ad is when displayed.

Competitive Criteria

PPC Engines usually rank advertisements when displaying them based on their performance history.
Your ad may be displayed in either a position of high visibility or low visibility.
Some form of optimisation rules are used by platforms that allow PPC advertising. This is how they determine how much visibility an ad gets in order to maximise the Engine’s ROI from their most valuable real-estate.
Certain ad real-estate is more valuable than others. Ads that appear close to the top have higher visibility, which means the selected audience are more likely to click them. In demand audiences are similarly valuable.
Because of this, advertisers favour high position placement.
Hundreds, even THOUSANDS of advertisers may target the same audience. PPC Platforms have no choice but to prefer to display some ads more than others. Consequently, engines only get to earn revenue from a small group of advertisers who compete for the same audience.
So they have to play smart.
Because it is not always possible to reach the group of audience you want with your message, it is integral that advertisers try to target several sub-groups of audience.
Since PPC engines only earn revenue from advertisers when ads are clicked, the engines use competitive rules to quantify the value of advertising real-estate and ad positions.
Software on the PPC platform positions ads that make more money for the engine in high visibility spots. On the other hand, ads that earn less revenue for the engine are given secondary priority and may never become visible to the audience at all.
Revenue-optimisation uses the following criteria to measure competition and real-estate value:

  1. Cost-Per-Click (CPC) Bid
  2. Click-Through-Rate (CTR)
  3. User experience

From engine to engine, the competition criteria differs. But most platforms use a minimum the above 3.
We can liken the selection criteria to a private auction.
In a real auction, something desired (in this case, top ad positions), are competed for by a number of people who want it. Each competitor in the auction has a different level of desire and willingness to pay than the other.

Advertisers who want their ad to be displayed to some group of the audience, tell the PPC Engine privately the maximum they would pay should their ad result in a click. This is called a maximum Cost-Per-Click Bid, or simply, “Bid”.

What it means, is that the advertiser agrees to pay at most their value of their bid. They may not necessarily pay the full amount, but if competition is fierce, they agree to pay the full price they specify.
The PPC Engine then, very quickly, and in real-time compares all the maximum bids with one another and ranks them in order of willingness to pay.
Your BID is the only thing you can directly control as an advertiser.
After all, the audience get a vote, too. The engine tries to optimise how much it earns from its best ad positions. If an advertiser bids high but their ad is not clicked often, the engine wastes a valuable position they could have given to a more attractive ad.
To determine the likelihood of an ad being clicked, PPC Engines store a historical Click-Thru-Rate which is updated in real-time.

Click-Thru-Rate is the number of times the audience click your ad, relative to the number of times it is shown against your competitors.

PPC Platforms usually maintain an average for each advertiser, each ad, and each audience targeted and use all this history to quickly tell how well an ad will do if given a desired position.
User experience criteria is a further measure of how well an ad will perform. If the audience click the ad and have a poor experience, it is an indicator of whether people who see the ad in future will click or not.
The 3 criteria, CPC Bid, CTR, and User experience are used together to competitively determine and optimise revenue the PPC Engine earns by placing the ad in a favourable position in future.

Advertisers Pay For Clicks

PPC Engines only charge advertisers when their ad is displayed and then consequently clicked.
After an ad position has been determined, an ad is put to the test and displayed to the selected audience only. If the audience are interested in the ad, they will click through to a page on the advertiser’s website. The PPC platform counts clicks, accumulates them, and bills them at a regular interval.
How much an advertiser pays for a click is determined, in part, by their CPC bid.
Since the Bid is a private maximum each advertiser is willing to pay, the platform will only charge a cent or so above the next highest competitor’s bid.
There is no way to know how much a PPC ad will cost for each click. Advertisers only know click-thrus to their website will never be above their maximum bid. This way, advertisers can still receive traffic in lower positions for a smaller cost.
Most engines also discount the actual cost per click based on how well the ad performs historically against competition. This encourages good advertisers to spend more money advertising with the engine.

How Bid Management Works

Competition and the competitive criteria used by PPC Platforms is a type of automatic bid management.
However, on some platforms like Google Adwords, an advertiser has other options to control their spending and return on investment. Following are some examples:
Automatic Placement
An advertiser has the option to use Automatic Bidding when they are more concerned with the position their ad receives instead of the click cost.
In such cases, the advertiser targets a specific ad position – say #1 or #2 from the top, and the PPC platform adjusts their bid to gain that position as often as possible. If the competition is fierce, and the advertiser specifies a maximum bid that’s too low to compete, the engine may automatically choose not to display the ad at all.
Automatic CPC Bidding
Some advertisers are more concerned with gaining the maximum exposure possible from their selected audience than cost.
On some platforms, again for example, on Google Adwords, one can setup their campaign to automatically bid on their behalf. In this case, the engine tries to get them the lowest cost for the highest amount of traffic possible.
I recommend only using this option in the first few days of a campaign to gauge how much it costs to advertise to that audience.  Also, as a safety net, advertisers should limit the Campaign’s Daily Budget in order to avoid surprise costs they cannot afford.
Another feature of some PPC Platforms that allow this mode of automatic bidding, also allow advertisers to set a maximum CPC bid they are not willing to go beyond. This limits  impressions and traffic, but it still gets as much exposure as the advertiser is willing to pay for.
Automatic CPA Bidding
Advertisers who use integrated Conversion Tracking tools may be less concerned with their click cost and place more importance on the cost of a customer or lead acquisition.
In this case, Cost-Per-Acquisition Bidding can be used on some platforms. This is a way to tell the Engine that you don’t care what a click costs, as long as a sale or lead can be acquired at an average cost less than $x.
This is rarely exact. PPC Engines have no way to know how well a click will convert at the advertiser’s website. So some Artificial Intelligence algorithms are employed in a “training period” where the engine learns the best audiences and positions that can accomplish conversion under the cost specified by the advertiser.
However, advertisers are still billed on a “per click” basis. If they do not convert clicks to sales or leads, they will have to pay whatever the cost per click.
The Engine’s responsibility is to make its “best effort” at finding the placements that keep the cost per conversion under what the advertiser sets.
It can be an effective form of bidding for many advertisers to to use CPA bidding. However, always ensure you allow a reasonable “training period” and number of conversions for the engine to learn the best placements.
This means, you should always begin with some kind of CPC bidding with conversion tracking on. After you have seen at least 30 conversions per Adgroup, you can see what it cost you on average and set your CPA bid accordingly.
— Learn more about the powerful PPC Advertising Model in Chapter 7 (Advertising, Traffic, and Promotion) of the YaghiLabs Internet Business Academy.

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Jim Yaghi

Jim Yaghi

Foremost Home Business traffic expert, Jim Yaghi is a Computer Scientist and Mathematician who used to build search engines for a living. At 16 he created a mildly popular social network and has been an online entrepreneur for over 15 years. In 2006 he rose to the #1 Affiliate rank in many Home Business programs (most notably Magnetic Sponsoring). Today he's best known for hatching the first industry-wide viral campaign to reach all major social networks, for hosting a top-10 Internet radio show for entrepreneurs, and for shattering industry sales records with his best-selling, easy-to-follow online marketing courses PPC Domination, PPC Supremacy, and Traffic KickStart.


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