AdWords offers four different types of bidding options. Each bidding option has different characteristics, uses, advantages, and disadvantages. It is important to understand which option you should be using so you are maximizing your time and getting the best ROI from your AdWords campaign.
These options are set at the campaign level. Therefore, your account could be using and testing different methods to find the best combination of bidding options for your business to be successful.
While the Set Maximum Limits and Budget Optimizer methods have been around for a while, Preferred Cost Bidding just rolled out of beta, so it's not well known yet and is a great alternative to the standard bidding option. The other, Pay Per Action, is still in beta. However, I've heard very good things about the launch so far, so I would expect it to come out of beta sometime over the next few months, and we'll explore that option as well.
Option 1: Set maximum limits
This is the default setting bidding option. With this option, you set the maximum you are willing to pay per click. You can set these maximum bid at the ad group or keyword level. However, you rarely pay your max CPC. Because of the ad rank formula, and the AdWords discounter, your actual CPC can vary widely per keyword or per day.
As a quick refresher, the Ad Rank formula (where your ad shows up in the search results) is:
Ad Rank = (quality score) x (max CPC)
Advantages
The biggest advantage to default standard bidding is that it is compatible with all of the advanced features possible through AdWords. It is also the only option that is compatible with position preference and advanced ad scheduling. If you are bidding by position or changing bids by time of day, the default bidding option is your best choice.
Disadvantages
The biggest disadvantage with default standard bidding is that your actual costs and actual CPCs can vary widely from day to day. You have little control over what you actually pay. If you know what every keyword is worth to you, it can be difficult to determine what max CPC you need to set to actually pay that amount. In addition, on any given day, you might actually pay that amount.
It can also be quite time consuming to determine what you need to bid to pay certain costs. This is the most time-demanding bidding option.
For instance, if you determine you are willing to pay $5 for the keyword "mortgage" you might have to bid $10 to actually pay $5 for that keyword. There is also the risk that you might end up paying $10 for that keyword. Therefore, the risk of overpaying compared to what you desire to pay is high.
Who should use this?
If you are using all of the advanced features, this is the only bidding methodology for you. If you are constantly tweaking your CPCs in trying to determine what is the best combination of bid price with other campaign settings, you will probably want to use this feature until you are confident in what a keyword is really worth, and then maybe move to the second bidding option.
Option 2: Preferred cost bidding
With Preferred Cost Bidding, the bid you set is the average CPC you are willing to pay per click. So instead of having to guess at setting your max CPC in order to pay a certain amount, Preferred Cost Bidding let's you set a bid cost at what you are truly willing to pay per click. This will be reflected in the average CPC. Each actual CPC may vary a bit, but overall, your average CPC should be close to your bid price. When you use Preferred Cost Bidding, Google will automatically calculate the max CPC you should be bidding to actually pay that amount; however, they will not show it to you. They do all the heavy calculations for each auction so that your ad shows in the position that is related to what you wish to pay per click.
Advantages
If you know how much a click is really worth, then Preferred Cost Bidding takes the hard part of trying to determine the max CPC to actually pay that cost off of your hands. For those who know exactly what they want to pay per keyword or ad group, this bidding method will save you a lot of time.
The second reason to use this bidding method is if you want more consistent CPCs. When setting max bids, your actual paid CPCs can vary widely on any individual day. Preferred Cost Bidding will even out the paid cost per keyword so you should see a more even click cost on a daily basis.
The last reason is if you don't want to constantly monitor and tweak CPCs. Since Preferred Cost Bidding automatically changes the max CPC so that you only pay an average CPC, there is less work in constantly tweaking bids.
Disadvantages
The disadvantage to using Preferred Cost Bidding is that you don't control your max CPC. You only control what you wish to pay. Therefore, the advanced AdWords features that are based off of changing max CPCs are not compatible with this bidding methodology.
At present, there are two features which are incompatible with Preferred Cost Bidding. The first is position preference. Position preference works by changing your max CPC so that your ad is shown within certain positions. If you have found your magical conversion spot by position, you will not want to use Preferred Cost Bidding.
The second feature that is incompatible with this bidding methodology is the advanced feature of Ad Scheduling. Ad Scheduling basic lets you turn your campaign on and off automatically by time of day or day of the week. This feature does work with Preferred Cost Bidding. The advanced version of Ad Scheduling allows you to automatically change your max CPC by time of day or day of the week. Advanced Ad Scheduling can be very useful if you've mapped out your sales cycle and are automatically changing bids based upon times of the week that have higher or lower conversion rates. However, since advanced Ad Scheduling works by changing the max CPCs, it is incompatible with Preferred Cost Bidding.
At present, any other new features that work by automatically changing your max CPC will be incompatible with Preferred Cost Bidding. Hopefully, Google will address these concerns. They could change advanced ad scheduling so that the bid changes are to your preferred CPC, and not to your max CPC. However, those are features that are on our wish list.
Who should use this?
If you know what your keyword are really worth this should be your preferred method. If you are frustrated with trying to constantly tweak the max CPC to actually pay a certain amount, this method might save you some time. This is quickly becoming one of my favorite bidding methodologies; however, there are quite a few campaigns I run that use the advanced Ad Scheduling features, so there are times when I can't use it even though it would be my favorite choice.
Option 3: Budget optimizer
The Budget Optimizer allows you to input a monthly budget, and then it will change your keyword bids in order to maximize your traffic. When you go through the process of enabling the Budget Optimizer, you input a budget for a campaign, and then AdWords will give you a suggested max CPC and an estimate of how many clicks are possible. As it's an automated system that is trying to spend your entire budget, and get the most clicks possible for that budget, you might see some odd numbers. It's always worth tweaking the max CPC and total budget a few times to see what the suggested max clicks are before enabling the Budget Optimizer.
It's worth noting that when you first enable the Budget Optimizer, you will see your keyword bids change dramatically. Some will be bid very low and others quite high. This is because it takes AdWords a week or two to determine how many clicks each keyword could receive and finding the optimal bids for those keywords. If you only use the system for a week, you won't receive the full benefit of this bidding strategy. You have to let it run for a month to see how it performs for your account.
