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I haven't managed a single program (20+ and growing) in which Pareto's Rule (aka 80/20 rule) didn't apply, regardless of how many keywords were active. It feels imparative that the core 20% (sometimes 10%) be actively managed with 24/7 bid rules using a 3rd party solution (e.g. Go Toast, Bid Rank, etc.).
Anyone willing to share ideas/enlighten me about applying the portfolio management concept to keywords?
I'll throw out a simple, 2-keyword, 2-position scenario and then show the advantage of a portfolio approach.
ASSUMPTIONS
1)Assume, for the sake of argument, that you have two keywords ('plasma TV' and 'flat screen TV') and that because you've been tracking cost and revenue diligently(both historically and near real-time), you're in a position to know what each of the two bid positions for each keyword will cost and produce.
2)Assume your business goal is maximum revenue at or below a $2 CPA:
Keyword #1 - 'plasma TV'
Position #1 CPA = $2.00; produces 15 transactions
Position #2 CPA = $1.00; produces 10 transactions
Keyword #2 - 'flat screen TV'
Position #1 CPA = $2.50; produces 20 transactions
Position #2 CPA = $2.00; produces 10 transactions
[obviously this is as simple a scenario as you can get, as is the goal for this portfolio of keywords; but it's to make a point, nothing more]
What you'll do if you're
a)using a rules-based bid management tool (like the ones taking out big booths at SES, PubCon and Ad:Tech)
b)using an internal spreadsheet that periodically marries cost and revenue data to kick out keyword-by-keyword bid changes
is take position #1 on the first keyword and position #2 on the second keyword, netting you 25 transactions at a $2 CPA. ***That is the opposite of the optimal choice for this portfolio of keywords.*** The optimal choice is position #2 on the first keyword and position #1 on the second keyword. Why? Because it more closely meets the business goal for the portfolio of keywords = *maximize* transactions at or below a $2 CPA.
Obviously a human could reach the same conclusion when the portfolio is 2 keywords, but what about when the portfolio is 1000 keywords, 10,000 keywords or 100,000 keywords? And what about when (as is the case more often that not) the competitive environment for the keyword portfolio is constantly changing, hour by hour, and when conversion rates, ASP and margin is changing over time for each keyword?
If you have 1000 keywords running on 3 SE's and there are, for example, 5 bid positions of meaningful volume, that means you have 3 x [5 to the 1000th power] potential portfolio choices, only one of which is optimal relative to your business goal. It's in situations like that that a portfolio-based bidding strategy is overwhelmingly advantageous.
WRT how to implement this, the only way I'm aware is to use a portfolio trading application of the same type used on Wall Street by the quantitative, or 'black box' hedge funds.
Some of the rules-based bid management vendors, and many agencies looking to snare a client, say they apply a portfolio approach, but what that usually means is
a)they think the client is dumb and won't know the difference
b)they periodically look at the top-performing keywords and try to average things out so they allocate profit from one keyword to on another less profitable one. In this case, though, the averaging is anything but data-driven, and certainly doesn't bother to look at the actual, immense number of possible scenarios that exist, uniquely, at that and every moment in time.
Granted, there are a couple types of businesses where this approach doesn't work:
a)sales where historical data has no value for predicting future performance, sporting event tickets, for example, or new movie-related keywords
b)situations where no historical, keyword-level data exists (and that describes 50%+ of the PPC market right now, especially the low end)
c)companies who haven't taken the time to clearly define business goals and values for the different types of actions users take on their site.
Interestingly enough, some of the largest PPC advertisers try to approximate this approach by employing banks of financial analysts to do all the calculations need to employ a portfolio approach. That's not ideal either, but it explains more than one ecommerce site headed towards IPO.
