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Keyword Bidding Strategy

Adwords Ad rank Formula says,
Ad Rank = Max. CPC Bid x Quality Score. (Higher is Better)
People want high quality score so that they pay minimum to stay at the desired position. Also, most advertisers have propensity to bid as low as possible. However, bidding too low not only limits exposure of your ads, they also deteriorate your Quality Score Value. If your keyword is relevant, higher bid gives you higher ad rank which means higher CTR and hence higher quality score. I had once discussed a formula for arriving at Optimum Max. Bid , which tells you to relate default bid directly to min. bid (interpret now as first page bid.). It still works fine with a minor tweak - In the wake of First Page Bid available, You just don't need to multiply the modal value by 10. It is a good strategy which helps you gain Quality Score, and allows you to actually produce clicks at a Lower CPC, than those who bid low and develop quality score problems and end up paying Higer CPC. Bid High initially and let it fall gradually is a good strategy.

Once you have built up good quality score, you may start gradual decrease of default bid, till you find the best bid which gives you best figure for clicks, CTR, Cost per conversion & conversions. In fact in the long run bid can hardly remain static. Whenever, you find fall in the expected returns just give all your campaigns and adgroups a bit of shake. Increase the bid a little and decrease it below the previous level. This back and forth shake is capable of giving you either equal volume of returns or more at a better cost per conversion. Do you wonder why? , it is because with every increase, most of the time you gain Quality Score, which allows you to bid lower for the same Ad Rank.

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