There is value in consistency. Knowing when a set of standards routinely occur, outcomes can be predicted with moderate success. Having consistency in life and business can provide great value. But when it comes to online advertising, consistency can be sought, but rarely is it obtained -- if ever. Online advertisers scrutinize copy, research keywords, and attempt to create campaigns that, at best, will possibly lead to consistent results.
But as is life, changes occur all the time. External factors play an important role when it comes to online advertising. And this environment makes an advertiser’s world anything but consistent.
Despite the knowledge and expertise that goes into an online campaign, at a moment’s notice, a sudden increase or decrease can occur. This single external factor (or combination of multiple factors) can skyrocket or plummet a campaign to places you have never seen. Causing exorbitant spends, loss of value, and one stumped advertiser longing for a return to consistent results.
Because online advertising is anything but consistent, there are many factors that could contribute to an unexplained change in campaign performance. Specifically, in this article we will look at changes in Cost Per Click (CPC) for a Google AdWords campaign caused by competitor entrance or exit to the bidding process.
With digital ad spending surpassing that from television and no signs of this trend stopping, digital advertising is in a state of flux. As budgets increase, new companies tiptoe into the digital space, and as digital strategies continue to evolve, consistency is hard to find.
Increased Competition for Ad Space
The law of supply and demand states that when there is an increase in the number of advertisers and the supply of advertising space is reduced, pricing will adjust upward and find a new point of equilibrium. This happens in every industry and is no different in the online advertising space. Within AdWords, the number of advertisers can be found in the Auctions Insights report. This report allows advertisers to track the competition in the same auctions and gain insight into their performance. Although one can control the price of their own bids, it is the competitors that determine how much you pay and where your bid will be positioned.
As more competitors are vying for the same keywords, competition is increasing and the CPC will rise. Many times this will be small increases. But on occasion, a substantial increase will occur.
For example, many marketing budgets are timed and budgeted according to month or year. If multiple competitors set their campaigns to begin on January 1st, or if multiple competitors increase their bidding limits because of a change in annual budgets, there will be an influx of competition converging on the same keywords, at the same time. This will cause a rapid increase in the CPC rate and lead to advertisers to wondering--What just happened?
Decreased Competition for Ad Space
Although the law of supply and demand states that when competition is decreased, pricing will follow suit. Yet, this is not always the case for online advertising. Because AdWords bidding is determined by Ad Rank which is Maximum Bid x Quality Score -- the highest ranked ad gets the top position. The CPC is then determined by the Ad Rank of the next highest ad divided by that ad’s Quality Score, plus $0.01.
If there are 30 competitors bidding the exact same price on the exact same keyword, the ad position will be determined based on the Quality Score of the ad. If ten competitors join the auction and bid at the exact same price, the CPC will remain the same and the ad position will be determined by the Quality Score. Likewise, if ten competitors leave the auction, the CPC will not be affected.
Since we all know that every competitor doesn’t bid the exact same way on every keyword, this is where the large changes can happen. Back to our example, if 30 competitors are bidding on the same keywords at different prices, the position of the ad is determined by the Maximum Bid x Quality Score. Since every competitor likely has a different maximum bid, it is easier to determine the order. But, if the ten highest bidding competitors all exit the auction at the same time, the remaining participants will all move up in Ad Rank. Although bidding will remain the same, the average position of the ad will change as every ad moves upward. For some, their average position will move from 6 to 2 with the exit of competition. What this means is that your ads are now showing, on average, in the second position on the search results pages instead of the sixth. This is great as your ad now has more visibility leading to a higher Impression Share and is being seen more often. But with that increase in position, the more visible location brings with it a more premium location, leading to a more costly CPC.
Competition is frequently changing with companies entering and leaving the advertising space. They are also changing their bidding strategies just as often. But when a large player, or many players for that matter, stop bidding on keywords at the same time--say the start of the month or the start of the year--there will be significant changes for those who remain in that auction.
What can be done to protect from skyrocketing CPC’s?
Since controlling the competition is impossible, small changes should be expected. But when there are large changes in mass exodus or even a single player with significant ad spend leaving an auction, how can you protect your budget from a significant increase?
When setting up your campaign it is always a good practice to enter a maximum CPC bid. This is the highest amount you are willing to pay for a click on your ad. If this is left blank, Google will happily spend your budget according to their ever-changing algorithms. But entering a limit will provide your campaign protection that your ad will not show if the CPC surpasses a set limit.
Although CPC rates can change due to a number of factors, we just dove into how they are affected by an increase or decrease in competition. Keeping an eye on the competition is critical to having success in the AdWords realm. A sudden change by a competitor can alter your campaign and have detrimental impacts--even if you were cruising along with consistent results. The digital advertising space is ever-changing--it is consistently inconsistent. Having knowledgeable experts manage your campaigns can prevent some of the hiccups in the road and bring some normalcy to an otherwise volatile industry.