Paid Search: Why is position 1 the cheapest?

In the last post we looked at Click Through Rate (CTR) and how knowing the CTRs of various ad positions helps us better plan our Pay Per Click (PPC) strategy.  This week we will look at changes in Cost Per Click (CPC) for each position and how knowing this can affect your PPC campaign.

We used the same data collection methodology as last time.  Hundreds of thousands of paid search results from past PPC campaigns were collected for the three major search engines (Google, MSN, Yahoo!).  As before we then removed low volume and all brand terms.

What we found was that the relationship between CPC and position was not an exponential curve like CTR.  Instead this graph was far more linear in nature with a general downward trend.  However, what was particularly interesting was that position one (position with the highest CTR) was not the most expensive; in fact it was cheaper than many of the less premium positions.  This is most likely (in Googles case anyway) because the top positions will likely have a high quality score, therefore leading to a lower CPC for these positions.  Position one, although having a lower CPC will still be a more expensive position overall due to the larger volume of traffic it attracts and therefore have a higher marketing spend.

As the above graph shows, the average CPC varies by search engine, with MSN and Yahoo! being on average cheaper then Google, and having a much more pronounced downward trend in cost as opposed to Google which maintains an almost steady price for positions one through ten.  This is likely due to Google’s dominance of the search market which means that people are willing to pay more to advertise with Google so competition is more intense.  It also means that bidding strategies need to be different for each engine.

So how can we use these insights?  Knowing how much an ad will cost by position allows you to more accurately calculate maximum bids for your keywords.

In the above example you can see that you would lose money if you bid on position one.  The largest margin is made on position five; but as the CTR will be lower at this position, total sales will be lower.

The trick is to balance volume and cost at each position.  As such, next time we’ll bring the two pieces of analysis together to see how knowing both the CTRs and CPCs will allow you to create the optimal bidding strategy.

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