As with Part #1 and Part #2 of this series on Why Did My Cost-Per-Click (CPC) Skyrocket? there is a common denominator that works its way into each problem. Despite the diligence to do well and the aspiration for consistent results, the unexplained changes in CPC can leave us scratching our head and wondering what happened when drastic change occurs. The denominator in the aforementioned articles, which also applies to many similar cases, is that the cause of these changes is not internal, but external. In this article, we’ll dive into how your CPC can skyrocket when a competitor alters their bid. Because as we’ve already seen a lot can happen when someone else makes a change.
What happens when a competitor lowers their bid?
The rational thinking is that when an AdWords competitor lowers their bids, their ads will decrease while everyone else in the same auction will see an increase in ranking. We rationalize even further that this will have no impact on our CPC, because after all, nothing was changed to our campaign and our maximum bid remains the same. Although this is partly true and this reasoning does make sense, AdWords has many moving parts and failure to keep them all in mind could result in unwanted surprises.
The change that takes place is relative to the change made. For example, let's say a competitor lowers their maximum bid by 5%. If after this adjustment their maximum bid is still greater than the nearest competitor (who was the nearest competitor previously), nothing will change. The Ad Rank for everyone in that auction will remain as is, despite this small external change. A larger change to the maximum bid, say a 25% decrease, may cause a small reshuffle among the advertisers. But again, it is only relative to those impacted by the change and their respective position in the auction.
If the advertiser with the highest Ad Rank reduces their bid by a significant amount so that they move from the top position to the bottom, then the anticipated universal change for everyone will take place.
What happens when a competitor raises their bid?
Similar to a competitor lowering their bids, a relative change will also occur when a competitor raises their maximum bid. But it is counterintuitive to think that a competitor raising their bid will cause your CPC to skyrocket, isn’t it? After all, the competition can set their maximum bid and everyone else in the auction will just hold their positions. If anything, dropping a spot in the Ad Rank would be the most likely outcome leading to a decreased CPC, right? Not so fast!
Since the primary factor for ad position is Ad Rank, that means the highest bid does not always get the top spot. Although the advertiser’s bid does play a role in ad position, the ads quality score plays just as important (if not more important) role in the ad position. Here is how your CPC can increase if a competitor raises their bid.
Advertiser #1 currently has a CPC of $1.21. Now, let’s say that Advertiser #1 keeps their campaign going as is, but Advertiser #2 increases their maximum bid by $1, how does this affect CPC? We know that Advertiser #2’s CPC will increase. But coincidentally, Advertiser #1’s CPC will increase as well. Advertiser #1 will still have the better ad position, but their CPC will increase (in this case by 133%).
As shown in this graphic, the change is minimal, but a competitor increased their bid and essentially “pulled” up the other advertiser’s CPC. Advertiser #1 is still below their Maximum Bid, but not yet exceeding it so there is still room to increase. Transfer this to a larger scale and the changes can be significant. If your keywords that are in the $40-50 range and a competitor adds significant spend to their AdWords campaign, a sudden increase in the CPC can leave you scratching your head, especially when your ad still ranks in the top position.
Watch Your Budgets
Again, this is the result of an external factor. A competitor is trying to grab a larger piece of the pie, but in reality, they are getting the same sized slice of a more expensive pie. It is important to keep an eye on your advertising budgets and know that if the maximum budget is not being spent, there is room for change. If you are consistently spending your maximum monthly budget, only one thing is for sure, it won’t increase. It may decrease and it may stay the same, all depending on what happens among those competing in the same auction. But if you are consistently below your monthly budget and happy with the results of your campaign, save the additional spend and keep fine-tuning the campaign for efficiencies. But beware, a lot can happen when someone else makes a change which can cause your CPC to skyrocket.