Pay Per Click – Google Ad Position VS Profit

 In PPC Marketing

This is a topic we discuss time and time again, with clients and colleagues alike. So we’ve put our brains to good use – formulating the relationship between ad position and business profitability by analysing search campaign data from an expansive client base and displaying the results.

The profitability of search advertising has four important factors:

  • Advertising cost
  • Value of conversion
  • Conversion volume
  • Internal cost

Conversions are generally defined as valuable actions taken on your website, such as appointment bookings or purchases.

Profit = No. of conversions * (Value per conversion – (Advertising cost per conversion + Internal cost per conversion))

How does ad position affect profit?

To determine which ad position is best for profitability, you need to consider the relationships between all four factors mentioned above.

For those who don’t know, ad position is reported in Google Ads from 1.0 (being the top of the paid listings section within the search engine results page) down to 7.0 and is reported as a decimal when averaged out. In the simplest example, if an ad shows up in position 1.0 once and then in position 2.0 once, it’ll be reported as “average position = 1.5”.

Ad position vs cost per click

There’s a clear relationship between ad position and the average cost per click. Generally speaking, the higher you want to advertise on Google’s search engine results page, the more it will cost you. However, this relationship is slightly more complex. It isn’t just dependant on your willingness to spend more per click, but rather how relevant and useful the ad is to any given user too.

Since we’re analysing data from varying business sectors and account strategies, we’ve determined the average relative percentage shift between ad positions. So in the following examples, we will assume an arbitrary cost per click of £0.75 and apply our findings to visualise what the CPCs would be for different ad positions.

Ad position vs advertising volume

The relationship between ad position and volume of traffic is also what you’d expect: users tend to click more on search ads higher up in Google’s results page. The click-through-rate (percentage of people who click the ad when it is shown) drops as the ad position lowers on the page.

There’s a huge difference in click-through-rate between position 1.0 compared to position 2.0, with the top position getting around 50% extra traffic than just one position lower.

Ad position vs advertising cost

The effect of having a higher ad position will greatly impact the overall costs due to the increased click-through-rate combined with higher cost-per-clicks.

Considering the percentage shifts from above, the overall advertising cost would approximately double if we were to rise from position 2.0 to position 1.0.

Internal cost vs ad position

Internal costs such as production costs, delivery costs, taxes, wages, premises costs, vehicle costs and etc are at the same relative value per conversion independent of the ad position. In other words, when calculating profitability you can set fixed internal costs on each conversion generated.

 

Ad position vs conversion rate

Arguably the most important element of the profit equation listed at the top of this article is the number of conversions we achieve. Does conversion rate differ with ad position? A question that many paid advertising professionals wonder. The answer, unfortunately, isn’t clear-cut.

Different industries, different tactics

For starters, conversion rates differ greatly from industry-to-industry.

E-commerce industries such as fashion may have a lot of ‘window shoppers’ and therefore low conversion rates – people who will look at hundreds of items before buying.

On the flip side, you have service industries that have very high conversion rates, such as emergency plumbers or locksmiths. When people need local assistance right away and are less fussy with little time to make a decision.

Comparing the nature of the above examples, you’d say that being in the number one position would be far more profitable for the emergency locksmith business. Not so much for the fashion retailer, since a user would likely browse through ads in positions 1, 2 and 3 rather equally.

Position #1 will encourage more irrelevant traffic

Naturally, being in position 1 will incur many costs from users who click your ad simply because it’s in the top position. Rather than consuming the contents of your advert and making an informed decision as to whether or not the advert is actually relevant to them.

An increase in irrelevant traffic translates to a lower conversion rate since that very traffic would likely bounce off your website.

So, ad position vs conversion rates?

Take the two points above and throw other variables into the mix, such as the number of ads above the fold for a given query, ad extensions, localisation, personalisation, plus many more which influence the success of your Google Ads – you paint a very complicated picture regarding ad position vs. conversion rate. Even Google’s own experts argue over this.

To get a reasonably accurate (general) representation of ad position vs conversion rate, you would need to work with an enormous data set, spanning over thousands of PPC accounts in all industries.

Which ad position makes the highest profit?

Having broken down the relationships between ad position and key variables above:

No. of conversions ∝ Ad position (a higher position means more traffic and therefore more conversion volume)

Value per conversion = Revenue generated

Advertising cost per conversion ∝ Ad position (a higher ad position incurs higher advertising cost per conversion)

Internal cost per conversion = A constant value

We can demonstrate that there is a fine line between driving a high number of sales and getting the cheapest possible clicks to achieve high profitability. One side of this proportionality helps to increase profitability, whilst the other decreases it.

In layman’s term, as we increase our bids, we improve our ad position and therefore increase our volume of conversions but at the expense of profitability (in most cases).

By plotting this relationship, we can determine which ad position would generate the highest level of profitability per conversion for various cases.

The example above clearly shows you that placing an ad in a top position would cause you to spend more money on advertising than what you would get back in revenue, making an overall loss. The ad position ‘sweet spot’ here, would be in the region of 2.5 – 5.0. An area where click volumes and cost-per-clicks are set so you’d make a genuine return.

This profit graph greatly shifts for different niches, websites and keywords. An extremely high-performing example leads us to the following relationship.

A website’s conversion rate is highly important in determining what the best possible ad position would be. For example, a poor converting website greatly shifts the outcome of profitability. The following example case is identical to the above, except the conversion rate of the website has been drastically reduced.

The fundamental issue here, with achieving profitability at “below the fold” ad positions, is that you will be unable to generate satisfactory volumes of profitable sales.

It’s also possible to never achieve profit. An effective website is at the forefront of successful search advertising.

Impression share over ad position

A quick note: Google have announced they will be sun-setting the average position metric in Feb 2019 (actual date for metric removal not yet known). This means that ad position analysis will be replaced with a more accurate and analytical method for gauging ad prominence, known as impression share analysis. I’m sure you will have already seen metrics such as “Top impression share” and “Absolute top impression share” floating around in your account – these are powerful metrics for analysing the performance of your advertising and visibility relative to your competition.

Future articles of this kind will compare performance metrics such as conversion rate, CPC and CTR against impression share rather than ad position.

Conclusion

If you are fixated on achieving a certain ad position, then you are most likely disregarding the profitability of your advertising. I would urge you to consider the performance of your advertising activity based on data. This will help you to determine how you should manage your search campaigns.

Your keywords or similarly themed keywords need to be closely analysed in terms of conversion rate, value per conversion and associated internal costs to determine how much profit is made overall. It’s imperative to secure the most profitable ad position for most, if not all, keywords.

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