Higher Bids = More Profits?

Does bidding more on good keyword terms boost your profits?

The answer is, well – it depends.

According to studies by Google and others (PDF link), the position your ad appears on the page of search engine results does not materially affect your conversion rate. So in the hypothetical example below, assuming the conversion rate is 10%, and a $10 Average Order Value, this would be the result of increasing your bid:

Position Clicks Cost Per Click Total Cost Profit
5 100 $.50 $50 $100-$50=$50
3 300 $.90 $270 $300-$270=$30
1 600 $1.20 $720 $600-$720=($120)

As you can see, increasing your bid in this case would be a mistake. Yes, there would be a lot more orders in position 1 (6 times as much), but you’d be losing money instead of making money.

Sometimes its best to be in the lowest position on the page where the cost per click is low, which translates into much higher profits than in the higher positions.