Amazon PPC Bidding Strategy
Amazon's advertising platform is built on an auction to determine who gets to show their ads. The auction involves everyone who wants to advertise for different keywords placing bids on these keywords, and the highest bidder gets to display their ad (this is a simplification; there are more factors involved).
The bid placed is the maximum amount you are willing to pay per click. This means that no matter how much your ad is shown, you only pay for the clicks your ad receives.
There are many ways to limit and structure your ad bids to achieve the best results possible, and there will likely be a blog post about this soon. But today, I will entirely focus on how much you should bid on different keywords.
How Most People Set Bids on Amazon
Before I go through how I think you should approach bidding, I want to first explain how most Amazon sellers bid on keywords and ads. Why? Partly so you can understand why the methods I advocate are better, but also so you understand the significant advantage you and your company will have over most competitors if you use the better alternatives.
So, how do most people do it? There are essentially two ways that most people do it, and both are equally poor.
#1 - Set Up Ads with Bids and Leave Them
Believe it or not, many companies and sellers set up their ads, set the bids, and then basically leave them alone. They specify the bids when they set up the ads, which is when they probably have the least data on what actually works and doesn’t work. I probably don’t need to go into more detail on why this is not a good tactic, but still, many do it this way.
#2 - Set Bids Based on Gut Feeling and (Un)qualified Guesses
This is probably the most common way companies, regardless of size, handle advertising. They set the bids based on some kind of gut feeling or what they think are qualified guesses, but in reality, they are unqualified guesses. These bids can be justified in many different ways, but all are essentially equally poor. Here are some examples of unqualified bidding and how the person responsible sets the bids:
- Copying bids from Google (Amazon is entirely different and should not be treated the same).
- Going entirely by gut feeling and moving some bids here and there at regular intervals.
- Setting bids on all keywords based on how a campaign has performed - keywords and their bids are unique and should not be lumped together just because they are in the same campaign.
- Using Amazon’s suggested bids (probably the most common way). The problem is that Amazon has no interest in you making a profit and has no idea about your margins - this is a sure way to set bad bids.
How to Set Good Bids on Ads
First and foremost, an Amazon account and different ad campaigns can be in various phases, and in some of these phases, you may need to handle bidding a bit differently. But let’s ignore that for now and focus on the phase that campaigns and accounts belong to 95% of the time.
Calculate the Average Click Value
To set a good bid, you need to know what a click is worth; only then can you know what bid to set. But how do you know what a click is worth? There are infinite potential keywords! Part of this involves setting up a good structure for the ads (which is a topic I won’t go through today), but another part is simply math.
If a keyword you are advertising for is “cool watch,” you will get clicks from this keyword and hopefully also sales. With these two parameters, number of clicks and sales, you can calculate the average click value. You do this by dividing the total sales generated by this specific keyword by the number of clicks the keyword has generated.
Sales / Number of Clicks = Average Click Value
For example: The keyword “cool watch” has given 109 clicks and $403 in sales. Each click is then worth $403/109 = $3.70 on average.
Set the Perfect Bid - What Are Your Margins?
Is the average click value the number you should set as the bid for the keyword? NO! Absolutely not. If you set this value as the bid, you would, on average, sell for as much money as you spend on ads, and considering margins, this would obviously result in a loss.
But how much should you set then? The answer here depends on your margins and what your goal for the ads is. For example, let’s say you have a 50% margin on the product you want to advertise. If you don’t want to be very aggressive in advertising, you can afford to buy ads for up to 50% of the sales price. But if you want to make some money on it, you need to bid less than 50%.
How much less? That’s up to you - if you bid much less, you will have better margins but probably get less traffic because other companies will bid more than you on the ads. If you bid closer to 50%, you will instead have lower margins but can potentially get more traffic and more sales.
Let’s say you decide that 20% is reasonable, then you are willing to pay up to 20% of the sales value for ads. On Amazon’s platform, this percentage value that you pay for sales through ads is called ACOS (average cost of sale). So let’s also use ACOS. If you aim to get a 20% ACOS, this is what I call the “ACOS target.” The actual ACOS may vary from period to period, but our “ACOS target” is set at 20%.
Set the Perfect Bid - Calculate the Bid
Now you have the average click value for this keyword, and you have an ACOS target; you can combine these to get the perfect bid. Multiply the average click value by the ACOS target, and there you have the exact bid you should set for this keyword to achieve your ACOS target.
Click Value * ACOS Target = Bid
Which is the same as:
(Sales / Number of Clicks) * ACOS Target = Bid
If we return to the example where the keyword “cool watch” generated $403 with 109 clicks. Click value = $3.7. Multiply this by the ACOS target of 20%, and we get $0.74 ($3.7 * 0.2 = 0.74). This, $0.74, is the bid you should set.
Things to Keep in Mind
Even if this is the “optimal” bid, there are two important things to keep in mind.
- This is only the “optimal” bid for this specific keyword. For other keywords, whether the keywords are similar or not, the optimal bid can be entirely different.
- What the perfect bid is will change over time. It is not set in stone but will change as conversions and margins likely change as well.
Summary – Bidding on Amazon PPC
First and foremost, thank you very much for taking the time to read this. Please share on social media or with friends you think would benefit from this. The actual calculation for the "optimal bid" is, as you can see, not that strange or difficult to calculate. But despite this, very few do it this way when they set their bids, instead bidding without structure and going mostly on feeling. This is just one of many aspects to consider when you want to succeed with your Amazon PPC, so make sure to come back if you want more tips and advice in the future. Good luck!
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