To optimise your Google Ads campaigns you need to understand how Google bids on your keywords.

Imagine if Google Ads only bid on users that then converted on your site.

That would be awesome, right?

And you’d be willing to pay a high cost per click (CPC) as you’d save a fortune on all those clicks that don’t lead to a conversion.

Of course, Google doesn’t know in advance exactly which users will convert, but there are sufficient signals about the user (device, browser, web visits, location and many more) plus the intent of the search term entered for Google to assign a decent probability of each user converting.

It’s worth paying a higher CPC (cost per click) for users with a high probability of converting than for users with a low probability of converting.

This is what a Smart Bidding Strategy does.

Google bids more when it thinks that the user has a higher chance of converting.

If Google bid perfectly then the revenue per click would go up in tandem with the cost per click, leading to a steady ROAS.

Intuitively, it’s worth paying more for certain search terms/keywords than others.

For example, the search term ‘buy adidas ultra boost size 38 today’ has a lot more purchase intent than ‘What shoe size am I?’

What is perhaps less intuitive, but critical to understand, is that you should be paying a range of CPCs for a particular keyword/search term, where the range in CPC reflects the quality of the user.

 

Why is this so important?

There are two really important conclusions from understanding that you should expect a range of CPCs for the same search term/keyword that reflect the quality of the user:

 

>>> Read the next article: Bidding Strategies and why Target ROAS is the best

>>> Back to main menu

>> Purchase an ANALYSIS OF YOUR GOOGLE ADS ACCOUNT

The interactive video below highlights some of the analyses we cover:

 

Please be really careful making changes to your Google Ads account

  • Google doesn’t always respond how you (or we) think it will. The way we think about Google Ads may not be the best set-up for your account.
  • Only change one thing at a time.
  • If possible, always use an experiment to test a change – particularly for significant changes such as moving bidding strategy to Maximize conversion value (Target ROAS).
  • Protect your financial downside by testing with limited spend in the experiment/change. Note that moving to a smart bidding strategy requires a learning phase where Google may not be efficient.
  • Be careful if adding/removing primary conversion actions – changing what Google is converting to can radically change what and who Google targets and how much it’s willing to spend.
  • Remember, all changes to your account are at your own risk. Mapflo shall not be liable for any damages; losses; lost revenue or lost profit.

 

Glossary of Terms

AOV = Average Order Value

CM1 = Contribution Margin 1 = revenue minus COGS (cost of goods sold) in an order.

CM2 = Contribution Margin 2 = margin on an order after all costs directly attributable to that order such as COGS, shipping, payment fees, customer service etc. (except for marketing).

CM3 = Contribution Margin 3 = CM2 less marketing spend. An ‘Estimated CM3’ value uses an assumed CM2 %.

CPA = Cost Per Action. In this report taken to mean cost per conversion or cost per order.

Keywords = words or phrases (assigned to an ad group) that match a user’s search term and trigger Google to bid to show an ad.

Lifetime CM3 = CM3 from all orders (or subscription payments) for a customer.

Profit = CM3 less all fixed overheads (such as salaries and office rent). Hence Optimising CM3 also optimises profit at the same cost base

ROAS = ‘Return On Ad Spend’ = conversion value divided by cost. A ROAS of 400% means you get four pounds of revenue back for every pound of ad spend.

Search term = the word or phrase that a user searches for on Google.

 

Additional Insights

Data set up and Tracking
E-Commerce Tips
Optimizing Google Ads
Excel Tips
Use mapflo instead of a spreadsheet for data analysis
Coming in 2023.