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Smart Positioning and Incremental CPC – New Google Beta. Very Confusing and Potentially Revealing?

Published: January 22, 2009

Author: David Rodnitzky

One of my clients had a message on their AdWords account login page inviting them to try out the”Smart Positioning” beta. The message, of course, suggested that feature would help the client save more money by paying less for the same amount of clicks. Naturally I was intrigued, but mostly just skeptical. Anytime the fox tells the hens they’ve invented a new way to help them, I just have to assume the worst! Here’s a screenshot:

I clicked the “learn more” link and was taken to a long informational page, which I’ve linked for you to read at your leisure. The page begins by explaining the benefits of Smart Positioning:

Smart Positioning (beta) is a bidding feature based on an auction model that differs from the regular AdWords auction model. Here are a few benefits of using Smart Positioning:

  • It’s designed to get you more clicks for the same total cost.
  • It aims to place your ad in the most cost-effective position each time it’s displayed on Google and the search network. (Learn how Smart Positioning works on the content network.)
  • It can reduce the frequency with which you need to adjust your bids

When I hear “more clicks for the same cost” that immediately makes me think of “portfolio management bidding”, made famous by Efficient Frontier. The concept of “cost-effective position” sounds suspicious to me, simply because cost-effectiveness cannot truly be measured without considering both price and conversion rate. And “reducing the frequency of bid adjustments” I guess is a good thing, but again, only if this is based on some sort of ROI determination, which in this case it is not.
The page then starts to get into the details of smart positioning. This is where I started to get royally confused. Google introduces the concept of “incremental CPCs”, which is “The incremental CPC for any given position is a trade off between two factors: increasing the ad’s cost-per-click (CPC) and increasing the likelihood of getting a click (clickthrough rate, or CTR).” To show us further how this works, they include a graph:

Does this make sense to you? Someone paying $.47 in position #2 would have to pay $.75 to show up in position #1, even though the person currently there is only paying $.50? I don’t get it. Somehow, however, this is supposed to be a benefit to advertisers, as shown in a series of examples that demonstrate how your CPC can decrease as a result of enabling Smart Positioning.

I just don’t get these examples, for two reasons. First, shouldn’t the bidder with the highest CPM (and Quality Score, but these examples assume that QS is equal for all advertisers), always show up #1. If two advertisers have the same CTR but one advertiser has a higher Max CPC than the other advertiser, shouldn’t that advertiser always win? How is this system any different?
Second, I find it interesting that these examples show significant bid gaps by position. For example, in examples #3 position #1 is $.48, while position #2 is $.33. Shouldn’t the advertiser in position #2 only be paying $.34, or one cent above the advertiser in position #2? Why is advertiser #1 paying a $.15 premium? I know that AdWords doesn’t provide bidding transparency, but AdWords’ own help section explicitly states that an advertiser will always pay $.01 above the next advertiser:

So either this example is just a poorly written one, or this is an admission by Google (perhaps inadvertently) that the efficiency of the auction is not quite what advertisers have been told that it is (to Google’s benefit).
In any event, I’m hoping some people smarter than me can read about this beta and understand it – I am totally perplexed and keeping my clients away from it until I know what I am doing!

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