Example:
There's only 2 advertisers. Me and Tom. I got rank #1 and Tom got rank #2. The quality scores of our ads and Tom's Max Bid - remain very stable, almost the same from one day to the next. Suppose I'm now bidding $5 and paying $0.40 CPC.
Here comes the interesting part... nothing changes in QSs of mine and Tom's ads.. Tom's Max Bid doesn't change either. Cause he's my friend and I know for a fact he didn't change it:)
I increase my Max Bid to $25. Magically my actual CPC jumps to $0.80
Puzzled... I decrease the Max Bid back to $5 and .. o magic.. my CPC is back to $0.40
Now if Google was in fact true to its official published formula of:
Actual CPC=$0.01+(AdRank of Ad Below Me / My QS) ....
This would never happen. Because as long as my Max Bid is above my Min Bid (which is very low, like $10c in this case and thus inconsequential)... it should NOT play ANY part in the calculation of my Actual CPC. Only the AdRank of the ad below me and my Quality Score are supposed to determine what I'm gonna be paying per click.. officially at least.
COMMENTS PLEASE
Actual CPC=$0.01+(AdRank of Ad Below Me / My QS) ....
Google's pricing model does not work this way. Raising one's max bid, with all other factors remaining constant, can and will likely raise your actual CPC. The "penny more than your nearest bidder" is a simplistic description of the way it works (but, still, a decent way to describe such a complex model to those new to the space) - but, in my experience, it's been repeatedly proven untrue.
This is an interesting observation. Comments/explanations from others?
Whose max bid are you referring to, yours or the person below you?
Your own max bid is used in part to rank you above the person below you - determining which rung of the position ladder you're on definitely impacts your actual CPC. And their max bid, in part, determines how high they'll push the auction pricing below you. Your own max bid has the same effect on the person above you as well.
But if we change our Max Bid and stay in the *same position*, then there should be no effect on Actual CPC (since our MaxBid plays no part in the formula for Actual CPC).
And therein lies the question....why does the Actual CPC change in that case? Makes sense?
But hypothetically, since you're the floor for the person above you, as long as you stay in the same spot, interactions with them won't raise your actual CPC. And since the person below you didn't raise your floor (their bid and quakity remained constant) and you stayed on the same story (as in the 7th floor... story), then yes, your costs won't budge.
But to assume that all those variables can be held constant, including not only your own (like quality, which is constantly evaluated and may have some aspects that are relative scores) but those of your competitors (ctr is in flux all the time, as well as other vars), is where I think the empirical tests you may do will lead to you conclude that G's oversimplified the description (which they have) to the point of leading people astray in conclusions (which I believe they have not).
And if you're doing direct-to-merchant ppc, where there's more than one person bidding for that domain but only one gets to show, you've essentially got some invisible (or partially invisible) competitors setting their floors among the stack you're in as well.
I have some keywords that are very narrowly defined and I occupy the top spot averaging position 1.0. Whether I set the my max bid at $2.20 or $12.00, my CPC stays exactly the same. This is a small volume keyword where nobody except me is crazy enough to bid $12 a click, but I have done so at times.
I think the interactions of a live, continuously changing, algorithmic auction are too complex to know whether we can exactly understand the answer to your question (and react to it in a meaningful way). To me, it's a little too detailed to be an issue. I compare it to asking what the affect of the displacement and rankine temperature of your car's engine will have on your ability to get to the mall quickly - it is determinant, but not macro enough as the larger factors in play that determine the outcome.
Have fun and good luck!
more variables that would have to be held constant... :-)
[edited by: RhinoFish at 11:25 pm (utc) on Dec. 24, 2006]
but even in a real market environment - the official components of the Actual CPC formula can be held constant if you have a friend ranking right under you. You know his CTR/ad/etc. didn't change overnight, you also know he didn't raise his bid. You know also that your CTR/ad/etc. stayed pretty much the same. The ranking also stayed the same because we monitored it for 24 hours and also the avergage ranks for us for the 24 hours are whole numbers (for example, me 3.0 and him 4.0).
Now.. if in this situation I hike *MY* Max Bid from $2 to $40 and magically my Actual CPC quadruples overnight.... and then the next day.. I relax it back down to $2 and the Actual CPC returns to the original as well....................
QUESTIONS, QUESTIONS....................
If it is broad or phrase, then you can never know all the search keywords that could trigger your ad, and therefore you could not know who all your competitors are.
If it is an exact keyword, I would not expect your CPC to increase in the scenario you have outlined.
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Keep in mind that if your competitor is always in #2, this doesn't always mean they have not changed their bid. For example, they might be using software that adjusts bids so that they are always in #2.
