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Every search engine marketing has seen it happen. You’re bidding a reasonable CPC on a keyword, making a nice margin when POW!, some bidder comes out of nowhere, bids five times as much as you, and pushes you down the rankings.

Experienced SEM managers usually assume one thing: this is the work of a novice who simply doesn’t track the metrics behind his purchases. In a matter of weeks (or maybe days), the novice will run out of money (and maybe go out of business), and all will return to normal.

But what happens when the novice doesn’t go away? Or even worse, what happens if the ‘irrational bidder’ isn’t a novice at all, but rather an entrenched and legitimate competitor? At this point, you have to ask yourself whether this really is irrational behavior, or whether you are simply not as competitive as your competition.

As I see it, there are five reasons why someone might be able to significantly outbid you on a keyword:

1. Differences in Lead Value: If you’re getting paid $50 a lead and your competitor is getting paid $100, it should come as no surprise that you’re getting outbid. Keep in mind that there are several reasons why a competitor might get paid more than you. Your competitor might deliver more volume than you, have a direct relationship with a merchant, or simply has negotiated a better deal. If your competitor has a better deal, it’s time to have a heart-to-heart with your sales team.

2. Better conversion rate: It’s astounding how many sophisticated search engine marketers completely ignore usability and conversion rate. By testing your landing pages, ensuring maximum site uptime and minimum page latency, and following basic usability best practices, it’s very possible to achieve a 2X or 3X conversion rate advantage over someone who doesn’t. Take a look at your competitor’s landing page and ask yourself whether your usability isn’t up to snuff.

3. Different financial objectives: If you are trying to hit 25% margins and your competitor only wants a 2% margin, it’s quite possible that your bid prices could be totally different. And keep in mind that the higher you bid, the greater the volume of clicks your ad will receive. Thus a lower margin and a higher position could actually result in greater profit dollars.

4. Better monetization: Like differences in lead value, your competitor might do a better job of squeezing a few extra pennies out of visitors to his site. For example, a competitor with an upsell offer or a registration path could have far superior metrics to a competitor who just has a landing page and nothing else.

5. Loss-leader strategy: Walmart sells some products at a loss to get customers in the door, knowing that those customers are likely to purchase a lot more higher margin products. It has also been suggested that big box retailers like Walmart sell below-cost initially to push out smaller local retailers. Your competitor could be using one or both of these strategies. They may assume that if they push you out of prime position on a keyword for a few weeks, you might give up on that keyword all together. A few weeks later, they may reduce their bid while you aren’t paying attention.

In the end, if a huge bid is clearly the work of a neophyte search engine marketer, it may be OK to sit back and wait for the bidder to spend himself out of a job in a few weeks. But if you see a major competitor suddenly upping the bids, it’s time to do a little self-examination. As much as we all want to conclude that our competitors are stupid, doing so without further examination may be tantamount to calling the kettle black!