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2016/04/27 21:12

Fixed ROI Profit-Driven Optimisation

Two parts of the campaign perform at certain ROI. We want to change the bids and maximally increase the conversion value, without changing the average ROI.

The growth (G) of the total conversion value after the change is:

FIXED ROI MODEL 1

– where V is the value of click and Clk is the number of clicks.

Before the changes all parts of the campaign have the same ROI. Therefore:

FIXED ROI MODEL 2a

After the changes, the average ROI remains unchanged i.e. the total value of clicks is equal to the total cost multiplied by (ROI+1):

FIXED ROI MODEL 3FIXED ROI MODEL 4 FIXED ROI MODEL 5 FIXED ROI MODEL 6

At the maximum growth (G):

FIXED ROI MODEL 12a FIXED ROI MODEL 8

The discriminant of the quadratic equation is:

FIXED ROI MODEL 9

and the solution:

FIXED ROI MODEL 10 FIXED ROI MODEL 11

 

Changing CPC by ΔCPC will maximise the income without changing the total ROI:

SEM ADWORDS Optimisation Fixed ROI

The elasticity data are available in AdWords interface (Bid Simulator) or via AdWords API (Bid Landscapes). The “1” and “2” may be any part/segment of the campaign: keyword, adgroup, segment. For example, “1” can be “mobile” and “2” – “desktop”, or “1” can be a keyword and “2” – all the other keywords in the campaign (in this case we should calculate total elasticity of all the other keywords).

How to calculate total elasticity of two campaigns?

From definition:

FIXED ROI MODEL 13

If in all campaigns the relative change of CPC is the same:

FIXED ROI MODEL 14

The formula for total elasticity is:

FIXED ROI MODEL 15

 

This model assumes that price elasticity does not change within the range of changes in campaigns. However, in reality, price elasticity decreases as CPC increase. Therefore significant changes of bids may be inaccurate and sometimes may have no meaning (e.g. change of bid below minus 100%). In practice, if the formula implies very significant changes of bids, you should not modify bids more than by 20-25% and after this modification, measure the elasticity again and continue optimisation at the next iteration. 



Author

Witold Wrodarczyk

Dyrektor Operacyjny Adequate Interactive Boutique Google Analytics & AdWords Qualified Professional

Adequate - Interactive boutique

Address:
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