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Monday, April 14, 2008

An Introduction to the Kelly Formula

Today we're going deep. We're going to examine a mathematical equation created years ago by a guy named J. L. Kelly. Kelly was a brilliant man who devised a formula that is so rudimentary, yet so critical, it is the foundation for many systems in the world of finance AND gambling. Here is the formula:

Fraction of bankroll to invest = Edge / Odds

Edge means any information you have that gives you better than 50/50 odds. For example, if you have a quarter that is weighted in such a way that heads should come up 60% of the time, then your edge would be 10%. On any one flip of the coin, you would have a 10% edge if you bet on heads. In the world of finance, an edge can be any information you receive that gives you an advantage over other investors.

Odds are odds. It is the payout from winning the bet or gamble. For instance, going back to the coin flip example, the odds would likely be 1:1, or even money. In the formula, this would just be represented as 1. If you guess the coin correctly, you would win an amount even to your bet. If the odds were 2:1, then a 2 would be used in the formula.

So using the above edge and odds in our formula gives us:

Fraction of bankroll to invest = 10% / 1, or 10%.

The formula tells you that you should invest 10% of your total bankroll on every coin flip.

If the odds were 2:1, then the formula would look like:

Fraction of bankroll to invest = 10% / 2, or 5%.

So...what does this have to do with search engine marketing? Everything.

To be as successful as possible in your search engine marketing, you need to allocate your funds to those keywords, ads, and campaigns that generate the highest return on ad spend. If you had enough information, you could use the Kelly formula to allocate your budget. If you don't have enough information, it is still a good mental model for you to follow. Put more of your money on keywords that have proven to be most effective.

We will be discussing these types of concepts more in later blog posts. I just wanted to introduce you to Kelly and get you thinking about the process of maximizing the return on your paid search ad spend.

If you need some help with your search engine optimization or pay per click management, please contact Work Media at 888-299-4837 or email Info@WorkMedia.net.

Labels: bid management, Kelly formula, paid search, pay per click, pay per click management, ppc, search engine marketing, sem

Tuesday, April 08, 2008

Designing a Pay per Click Management System

In the course of working on our latest book, I have put a lot of thought into the concept of a trading-style system for managing a paid search campaign. There is definitely a correlation between investing in securities and investing in paid search. Every keyword you bid on is sort-of like a stock: you are bidding a certain amount in anticipation of turning a profit on it.

Possibly the investing concept (also a gambling concept) that is the most relevant to pay per click is money management. You want to allocate your budget to the keywords that will maximize your profit and minimize losses. Unfortunately, unlike with securities, you have no historical data to use to test your beliefs except your own. And it costs money to generate your own data.

There's no way around it. If you want to successful in paid search, you have to be willing to pay the price to generate enough data to know what changes you need to make to your account.

Another big difference between trading securities and managing a paid search account is that there are other variables other than just the keyword (the "security") and the price paid for it. With paid search, you have more "touchy feely" things to deal with - namely, your ad copy and landing page copy/design. You can have your account set up just right and your bids set perfectly, yet still not be successful because of your ads and landing pages. There is a complex relationship between the keyword, bid, ad, and landing page. A weakness in any of the elements can greatly diminish the effectiveness of a pay per click campaign.

But again, it all just comes down to generating data, and the way to do that is to test, test, test. With our new book, we hope to give readers a reasonably simple system to use to properly allocate their budget. The rest is just good ol' split-testing and constant revision.

If you need help with PPC management NOW and can't wait for our book to come out. feel free to call us at 888-299-4837 or email Info@WorkMedia.net.

Labels: bid management, internet marketing, keywords, paid search, pay per click, pay per click management, pay-per-click, ppc, search engine marketing, sem, web site marketing

Monday, March 24, 2008

Thinking Hard About Pay Per Click Management Strategy

I've been reading a lot lately about trading systems - that is, rules-based strategies for making short-term investments in stocks or other securities. So far, most of my personal stock purchases have been made in more of an "investing" mode, as opposed to trading. In other words, I'm buying stocks that I think are undervalued or that have strong future prospects, in order to realize long-term appreciation in the stock prices. Trading is completely different. It is based purely on things like volume of purchases and momentum.

What's the point, you ask? It's that there is a strong correlation between the trading of securities and the management of a paid search campaign. For instance:

When trading, you are buying something at one price in hopes of selling it at a higher price. In pay per click management, you are biding a certain price for a click in hopes of turning a profit on it.
When trading, many, if not most, of your trades will be losers, with the hope that your winning trades outweigh your losers. In pay per click management, most of your clicks will be losers, with the hope that you have enough clicks that convert to outweigh your losers.
Trading involves a set of stocks or other securities. Pay per click management involves a set of keywords or web sites.

One major area of difference between a trading account and a paid search account is that paid search has a strong creative element. Even if you do the math right, if your ads are lousy or your landing pages are lousy, you're still going to lose. But we have some ideas that we think will make the creative side easier even for novices.

We have begun work on our newest book, that will be a rules-based strategy guide for managing paid search accounts. This one will be shopped around to real publishers, rather than publishing it ourselves as we have in the past.

For the time being (until you get a chance to buy our book), the point is to think of your pay per click campaign as an investment. Your keywords are the entities (your securities) that comprise your portfolio of keywords. Some keywords are going to make you money, and some (if not most) keywords are going to lose money. You need to figure out which ones are your winners.

If you need some help with your pay per click management, contact Work Media at 888-299-4837 or email Info@WorkMedia.net.

Labels: bid management, internet marketing, paid search, pay per click, pay per click management, ppc, search engine marketing, sem, web site marketing

Monday, May 07, 2007

Search Engine Marketing: Not All Keywords Are Created Equal

We have given advice on numerous occasions about using an ROAS (Return on Ad Spend)-based approach in setting your initial bids. In other words, don't just GUESS what your opening bids should be - use some logic to set a bid that will allow you to make a profit, assuming some minimal level of conversions. But once your campaign is running, you need to re-evaluate your bids on a keyword-by-keyword basis.

Over time, you generate solid data that you can use to adjust your bids. But until you have enough data, you need to use some common sense to make your adjustments. The main question you need to ask with regard to each keyword is: what is the likelihood that a person using this keyword will purchase my product or service? If the keyword is a broad, generic one related to your industry, the likelihood of any one person converting who visits your site from an ad triggered by the keyword will be very slim.

However, if the keyword is more specific, that would indicate a higher likelihood of a conversion because the person might be further along in the buying cycle. Therefore, that keyword is worth a higher bid.

Here is an example. Let's say you sell refurbished laptop computers online. A keyword like "computers" or even "buy computer" is very broad. It is also probably going to be very expensive. You might bid on the keyword to cover your bases, but you would probably bid low and really wouldn't expect a whole lot from it. But a keyword like "refurbished HP laptop" is much more specific. That would indicate a person who has already decided what he wants (a refurbished HP laptop) and is looking to buy it. For that keyword, you would want to bid more aggressively because of the higher chance of making a sale. Finally, a keyword like "refurbished HP Pavilion ze2000 laptop" would be the best of all because of its specificity. If you happen to have that model of laptop for sale, it might be worth bidding very high on the keyword because of the high likelihood of generating the sale.

If there is anything we can do to help you with your pay-per-click keyword bid management, please contact us at 888-299-4837 or email Info@WorkMedia.net.

Labels: bid management, internet marketing, pay per click, ppc, roas, search marketing, sem, sponsored search, web marketing

Tuesday, May 01, 2007

Preferred Cost - Using Google's New Ad Pricing Technique to Reduce Your Risk

Traditionally, bidding on clicks in a search engine has been a hit-or-miss proposition. You set the MAXIMUM you are willing to pay for a click, and then your actual click cost usually ends up well below that. To play the game, you have to be willing to bid high to get your actual cost about where you want it. But you also run the risk of getting burned by being forced to pay what you bid.

Google has released a new ad pricing method that reduces your risk - preferred cost bidding. In this new method, you don't specify a maximum bid - you specify an AVERAGE price you are willing to pay for clicks to your site.

For example, if you know that, based on your historical conversion rate, you can afford to pay a maximum of $.50 per click to achieve your desired return on investment, then you can set a preferred cost per click of $.50. Google will then adjust your ad ranking on the fly to get your average cost per click as close to $.50 as possible. You are freed from worrying about getting burned by bidding more than you really want to pay. It also frees you from having to constantly monitor your bids.

To make this technique work, obviously, you have to understand your numbers. You need to know how many people who click through to your web site become customers and how much profit you earn on them. If you know the lifetime value of your customer, that's even better. But as long as you know how much you can afford to pay to generate a sale and what your conversion rate is, you can figure out how much you can afford to pay for a click, and use that as your preferred cost.

We think there is a lot of potential in Google's new pricing scheme and we will definitely be checking it out. If you have enough information about your business, then we suggest you do the same.

If you would like some help managing your Google campaign bids, contact Work Media at 888-299-4837 or email Info@WorkMedia.net.

Labels: bid management, google, Google Adwords, internet marketing, paid search, pay per click, search engine marketing, search marketing, sem, web site marketing

Wednesday, February 14, 2007

Pay-Per-Click Marketing: Expand Your Horizons

The American pay-per-click market is getting crowded. You can still keep costs down by taking a "long-tail" approach (looking for lots of little used by highly targeted search phrases for which to run ads), but with growth in paid search revenue for 2007 estimated at 27% by Merrill Lynch, it is going to get increasingly more difficult to get a leg up on your competition.

So perhaps the time is nearing when you want to take a more global approach to your PPC (if it's relevant to your business, of course). Click prices for PPC campaigns in other countries are generally much lower than in the U.S. Yet the U.S. accounts for only 21% of the worldwide Web population. For those of you not that good in math, that leaves another 79% of the entire World Wide Web for you to market to.

One important key to being successful using paid search worldwide is segmentation. For one thing, you don't want your ads and bids for other countries mixed in with your U.S. ads and bids. You may end up bidding more than you need to. And ads for other countries need to be written for each country specifically. So each country in which you market your services via PPC should be set up with its own campaign.

It will take some work to figure out how to write your ads for other countries. You might want to start slow with countries that are not that different from the U.S. - Canada, Australia, the U.K., etc. A next logical step might be Spanish-speaking countries, such as Mexico and Spain. Of course, when you enter the domain of advertising in foreign language markets, you will either need to be fluent in the language or able to hire someone who is.

And as with all PPC campaigns, you will want to create landing pages tailor-made for each country. Your landing page design and offer should also reflect the culture of the country.

Will it be a lot of work? Yes. But you will open yourself to 5x more prospects, to whom you can advertise for cheaper than in the U.S.

Please contact Work Media today at 888-299-4837 or info@WorkMedia.net if you need assistance planning or managing a pay-per-click campaign for your business.

Labels: bid management, internet marketing, paid search, pay per click, pay-per-click, search engine marketing, search marketing, sem, sponsored search, web marketing, web site marketing

Wednesday, February 07, 2007

Warnings on PPC Bid Management Software

Bid management software for managing pay-per-click campaigns seem like a great idea. You tell the software what you want your campaign to accomplish, set up the ads, and let the software do the work of changing bids many times a day to accomplish your goals.

But it ain't all it's cracked up to be. And it ain't what it used to be.

For one thing, the search engines, while making their API (application programming interface)'s more robust, are making access to them more difficult. Yahoo has placed restrictions on the number of calls that can be made to an API. What that means is that if you have lots of keywords in your Yahoo search marketing campaign, there is going to be a tight limit on the number of times that bids for those keywords can be updated in any given day. That's the whole point of bid management software - to change bids.

Google, by contrast, has not such bandwidth limitation, but it charges for use of its API. We like to call it the Google tax. The current rate is a quarter for every 1,000 calls to its API. $.25 may not sound like much, but consider this: updating a single bid will likely require several calls to the API. If you have thousands of keywords that are all being updated 10 or 20 times day, that is many, many thousands of calls to the Google API. Over a month's time, it definitely adds up.

But on top of the problems using the search engine API's is the fact that bid management software generally works by making constant updates to bids to try and achieve some kind of specific metric, such as return on investment (ROI). If you guess about what the target metric needs to be, you could end up with bids that are way off. If you target an ROI that is too high, you may force the software into setting bids too low, which could end up cutting way back on the amount of traffic you generate. Likewise, if you target an ROI that is too low, you could end up paying more for your clicks than you need to.

The way to find out how you need to use your bid management software is by manually running the campaign for a while, doing lots of testing, and generating data. Once you have an idea of what your typical conversion rate is and what your profit is on a typical conversion, then you can determine what your bids need to be and what you can expect in terms of ROI. This kind of information is extremely valuable in figuring out how to configure your bid management software.

If you would like some profesisonal help in managing your pay-per-click marketing campaign, contact Work Media at 888-299-4837 or email Info@WorkMedia.net.

Labels: bid management, Google Adwords, internet marketing, paid search, pay per click, pay-per-click, ppc, search engine marketing, search marketing, sponsored search, Yahoo Search Marketing