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How to calculate the right bids for Amazon Advertising keywords

Amazon keyword and bid management-1

How to tackle performance-based optimizations

Whether we're working on a campaign, an ad group or a keyword – as PPC experts, we love to set up and manage every single component of the campaign to be as efficient as possible. Having only one aim in mind: campaigns that generate as much revenue as possible for a given budget and at a specific ACoS target.

In Amazon Advertising, performance-based optimizations are still one of the biggest challenges. How does it work? In addition to an ideal campaign setup, the size of your budget and the maxCPC bids for your keywords play a crucial role.

The Consequences of Badly Placed Bids Cost a Bomb 

It is either because:

  • the bids of every single keyword are too high and you generate too many clicks and traffic, but it does not convert as expected – your ACoS is, thus, too high for the keyword.

Or because:

  • the bids of your keywords are too low and you get too few clicks: you leave traffic and thus potential, profitable returns behind.

If you look at the performance of your campaigns and find that they are either too expensive or too cheap, you should immediately act and increase or decrease your bids. This rule-based management via the "target-actual-delta" works especially if you collect a lot of data (clicks and conversions) on keywords everyday: if the performance of last couple of days is not ideal, you can react accordingly.

Amazon Advertising Bid adjustments - the problem with rule based_ENG

Amazon Advertising Bid adjustments - the problem with rule based

The Limits of Rule-Based Management

Unfortunately the dear Spaghetti Monster invented the mid- and long-tail: the most of your keywords collect so little data that you cannot evaluate the performance of a single keyword correctly: you would have to wait eternally (in the truest sense of the word: eternally) till sufficient data is received and you can adjust your keyword bids upwards or downwards. Also, the question remains unanswered as to when I should adjust the bids for individual keywords at all. After 10 clicks? 100 clicks? After 1 conversion? Or after spending 100€ on the ads?

Measure Your Optimal Click Price

As an alternative to rule-based management, you can calculate the bids for your keywords with a simple formula. All you have to do is to answer the following questions:

  1. How likely is it that somebody clicks on my ads and then buys a product?
  2. How high is the expected profit of a sale?
  3. How much am I willing to invest in my advertisement sales?

When you know, how high your conversion rate and your expected shopping basket value are for your keywords, you can easily calculate your optimal bid based on your ACoS target.

Formula on how to calculate PPC bids

Formula on how to calculate PPC bids

Here is a simple example:

Say, every 20th person clicks on your ad and makes a purchase. Then you would have a conversion rate of 5%. Your average expected basket value for the keyword is 50€, your target ACoS is 10%. Then, your target click price (CPC) is 5% * 50€ *10% = 0,25€.

  • If your click prices are currently higher than your calculated optimal click price, you should lower your bids, because you probably invest too much money in advertising with this keyword and have set your bids too optimistically.
  • If your click prices are currently lower than that, you should increase your bids, otherwise you will lose profitable sales.

So far we have looked at how to calculate the best click price for your keywords. The problem we have now is that with Amazon Advertising, you do not set the actual click price, but a maximum bid (=maxCPC). In order to determine the optimal maxCPC for the keywords, the difference between the actual click price and the maxCPC must be taken into account.

The Actual Challenge: Calculating the Conversion Rate

Even though the above formula for calculating bids is extremely simple, determining the conversion rate for individual keywords is all the more challenging. Especially in the mid- and long-tail there is only little data available which can be used for a good prediction of the conversion rate. With the help of simple regression models or advanced machine learning algorithms, the conversion rates can be predicted very well even for a small amount of data.

You found out that your ACoS is too high for some keywords? You can learn more about what you can do to improve the ACoS of your Amazon ads in addition to smart bid adjustment in our post "Tips: How to optimize ACoS".



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