In this post, we see how the bid per click determines the search results' position and the ACOS of advertising campaigns.
We will first make a very brief introduction on what the per click bid is. Then we will show the formula with which Amazon orders sponsored search results and how the actual cost of the click is calculated. Finally, we will give the formula to calculate an optimal bid per click.
Sponsored results usually appear at the top, middle, or bottom of the search results page. They stand out from other organic results because it is written sponsored under the product. If the user views and then clicks on the sponsored content, the seller who performed the campaign will be charged a cost per click. Every time, however, the content is only displayed to the customer, it costs nothing.
To appear sponsored results, the seller will need to create an advertising campaign in Amazon Advertising. Creating a campaign basically means doing three things: choosing which products to promote, on which keywords, and choosing a bid per click for each of them. The bid per click indicates how much the seller is willing to spend to receive a click. The actual cost per click (or CPC) will be less than or equal to what was offered. This is because the seller is actually participating in an auction along with all the other sellers who want to promote their products on the same keyword. The cost per click will then be determined by the auction result and how much other sellers have bid.
Now let's see how Amazon sorts sponsored search results. How does Amazon choose which product to show first, and which product second?
For each sponsored keyword, Amazon calculates the Ad Rank as the multiplication between the bid per click and clicks' probability. The seller chooses the bid per click, while Amazon estimates the probability of that click. We talk about probability because Amazon does not know how many people will click on the ad. If the campaign has been running for some time will show the click-through rate (or CTR), the clicks over impressions. When amazon estimates the probability of clicks, it's like estimating how the CTR will be in the future.
Let's now look at an example.
Let's say we have three Amazon sellers who want to sponsor on the same keyword. The first bids 76 cents, the second 75, the third 60 cents. For each, Amazon calculates the probability of clicks or expected CTR. In this case, we have assumed that for the first two it is 2%, for the third 5%. The Ad Rank is then calculated as the multiplication between the bid per click and the expected CTR. So we did 0.76 times 0.02. The same is calculated for all, and the products are ordered from the highest to the lowest Ad rank. From the data, we see that the first in the search results was the seller who offered sixty cents. This is because, according to Amazon, it had a high click-through rate. This is very important because it shows that to get first in sponsored search results it does not need to bid high, but it is actually a mix between the bid per click and the probability of clicks.
Cost per click (CPC)
Now let's see the formula with which the actual cost of clicks is calculated or the CPC.
The formula is the Ad Rank of the seller next to us divided by our expected CTR. So let's say we're the seller who offered 60 cents. To calculate the CPC, we take the Ad Rank of the next seller. That is the one with the bid of 76 cents, and we divide it by our expected CTR. To calculate the CPC, we do 0.0152 divided by 0.05 and get a CPC of 30 cents. The reason for our competitive advantage over others was to have a high expected CTR. We got a better position in the search results despite offering less.
So a seller who wants to promote a product that is not very relevant to the final customer will have a low probability of clicks, and therefore, to compensate, will have to bid higher. On the contrary, sellers who sell relevant products, for example, the best sellers in the category, will have a high probability of clicks and can afford to spend less on clicks.
The seller has two levers of action. First, calculate the bid per click it is willing to spend and then have Amazon calculate the highest possible probability.
The optimal bid per click
Let's see now how to calculate the optimal click bids.
So let's say we want to promote a product with a retail price of $ 145. Amazon suggests a $ 0.76 per click bid. The suggested bid is not necessarily optimal for our product because it does not see the sales price or our page's conversion rate. It's the average of all the costs per click of the other sellers promoting that same keyword.
Anyway, let's assume we choose the one suggested by Amazon and run the campaign. After a week, we see this data. 350 clicks and 4 orders, therefore with a conversion rate of 1.14%. Amazon does not show conversion rate, but it is easily calculated as the number of orders divided by clicks. Ad spend is $ 266, and sales are $ 580, so the ACoS was 45%. The ACoS is calculated as the expense divided by the sales. So far there is no problem, but let's assume that the seller wants to have an ACOS of around 30% so that he will keep the campaigns active in the long term.
So we're going to calculate the optimal bid per click based on desired profitability, rather than looking at how much the market is spending at the moment. In doing so, we assume that the page will continue to convert at the same rate. So the conversion rate will remain 1.14%. This isn't necessarily true, because the conversion rate changes over time. But in this case, we make this hypothesis. So we always expect 4 orders every 350 clicks.
An ACoS of 30% means that the $ 580 in sales will have to be generated from $ 160 in ad spend. Therefore, as 350 clicks were generated, then $ 0.45 per click.
This calculation should be redone periodically because the conversion rate changes both for internal factors, such as changing the selling price and the number of reviews. Or due to external factors, such as competitors' actions, their selling prices, and the seasonality of the market.
Advigator uses this formula to automatically sets bids per click. So, Advigator users can forget it. It's automatic. The seller only sets the ACOS target. The bid per click is re-calculated and applied to your campaigns every day in the background.
Let's see now how to improve the click probability.
Amazon calculates this metric from a very complex model. These are the factors that come into play in the calculation. First of all, the context of targeting.
The best way to calculate the expected CTR value is to look at historical data. Then Amazon sees the ASIN's CTR on that search term. The click-through rate of the search term on all ASINs, and the CTR of the ASIN on all search terms.
The number of clicks, orders, conversion rate, selling price, Prime eligibility, ASIN ratings, and seller ratings. It's also important the number of days since the launch and the Best Sales Rank.
But what can the seller do?
Well, first of all, entering keywords with a high CTR% and number of clicks. In this way, you will have a higher expected click-through rate, and you will win better positions at a lower cost.
You will also need to make sure that the keywords are highly relevant to the product.
They must be present in the title and within the page. Official title length and bullet-point guidelines must be respected.
How can Advigator help you with all of this?
The software automatically calculates the bids per click according to the formula seen previously. There is no need to do any calculations. Everything is done automatically by analyzing the click and sales data of the campaigns every day.
No artificial intelligence model is used. Although saying it would have shown us smarter and kind of wizards. In fact, we have seen that the formula shown is more effective and gives you more control of what's happening every time.
The selected keywords are those with sales or with a CTR greater than the average. This is for the reasons previously described.
There is no need to waste time finding keywords with other software because auto-targeting campaigns and other methods are used to retrieve them for you.
Most of the work is automatic. Advigator is very simple to use. Just enter a budget and start the campaign. It will be created and kept optimized overtime automatically.
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