It’s a pretty common request we get from Amazon sellers:
“I want to achieve improvements in both volume (increasing orders / revenue) and ROI (decreasing ACOS) – oh, and I want to accomplish this quickly!”
However, what many sellers do not understand is that volume & efficiency can be competing goals, meaning that working towards one can undermine the other.
It’s a little tricky to understand, which is why CPC Strategy created our “Amazon Advertising Triangle” to help explain how we approach our Amazon management process.
You have 3 choices…
Amazon sellers have three choices (based on their short or long term company goals) including:
- Increase Volume Quickly (short-term goal)
- Increase Efficiency Quickly (short-term goal)
- Increase Volume & Efficiency (long-term goal)
Don’t worry, in the following blog post Jeff Coleman, VP, Marketplace Channels at CPC Strategy explains how you can think about this dichotomy, and factor in a third (and very important variable) – time.
Choice 1: I want to increase orders, quickly.
The first option is to grow volume quickly by maximizing exposure & impressions through aggressive bidding, but keep in mind – eventually you’re going to sacrifice efficiency.
“The levers we pull to do this are bid & keyword volume,” Coleman said.
“We maximize bids on as many keywords as possible (including adding new keywords that might not already be included in the campaign) that generate orders in order to bring in as much volume as possible.”
So why is “Efficiency” sacrificed at this point on the triangle?
Well, there’s a couple reasons:
1. First off, bids are increased on marginal / unproven keywords (including new keywords). There’s no guarantee that any keyword will convert, no matter how relevant it seems. By adding in new keywords, you also add in the risk that that spend will not result in sales, and if it doesn’t, your ACOS will rise.
2. Second, there’s also no guarantee that the keywords that convert today will convert tomorrow. Competition changes, customer demand changes, etc.
Which is all the more reason why you need an agency to constantly monitor advertising performance & make adjustments.
3. Lastly, increasing bids on converting keywords typically raises ACOS (even if it does result in more orders). Why?
According to Coleman, the challenge all advertisers face is that “there are diminishing returns to every additional click we bring in, which means that conversion rate will typically drop as traffic increases.”
“At the campaign or ad group level, usually the first 100 clicks you bring in converts better than the second hundred, which converts better than the third hundred, and so on.”
“At the individual keyword level, let’s say you bid $1 to get 20% of the Impressions for a particular keyword, and let’s say that results in 100 clicks. If you increase your bid to $2 and that gets you 40% of the Impressions for that keyword resulting in another 100 clicks.”
“Now you’re at 200 clicks. Great! But you were already getting 100 clicks & now you’ve doubled your bid, which doubles your bid on that original 100 clicks you were already getting.”
“Now your ACOS on that first 100 clicks has doubled. That can make sense if there are enough additional orders to justify the increase in spend, but your ACOS has still risen. Volume has increased at the expense of efficiency.”
“More traffic can bring in more orders, but typically not at the same rate, which causes ACOS to rise as you increase bid & bring in more traffic.”
“So, even a high-converting keyword will see increases in ACOS as you increase the bid because of those diminishing returns.”
Keep in mind, at some point a keyword plateaus with the amount of traffic it can bring in, which means you have to add new keywords if you want to grow volume with no guarantee that those keywords will convert as well.
“Part of the process of optimization involves testing those new keywords, seeing which ones fail, and then pulling back on them. But obviously that testing requires clicks which also costs money.”
Choice 2: I want to decrease my ACOS, quickly.
The second option is to increase efficiency quickly by cutting out wasted spend which entails cutting bids on inefficient keywords & pausing poor keywords altogether.
The reason that this point sacrifices volume is that even an inefficient keyword generates orders.
For example, a keyword generating 10 orders / month at a 100% ACOS is inefficient. Cutting the bid will reduce cost & cut ACOS, but it will also reduce impressions which leads to fewer orders (or possibly no orders at all).
“If a client is unprofitable & needs to improve ACOS quickly, it is going to come at the expense of volume. And then once a more profitable point is reached, we can identify which keywords are the most profitable & begin re-increasing bids on those to see if we can grow order volume without becoming unprofitable,” Coleman said.
Choice 3: I want to increase orders & improve ROI (slowly).
The third option is to increase both volume & efficiency but in almost any advertising campaign, this takes time.
Keep in mind, increasing volume involves buying more traffic which also requires an increase in spend.
Why Choice 3 is Your Best Bet:
In closing, the real question is: Can Sellers ever achieve improvements in both volume (increasing orders / revenue) and ROI (decreasing ACOS)?
The good news is – yes!
But it’s not going to happen overnight and here’s why:
“In the long run, you achieve volume & ROI growth by identifying the optimal bid for each keyword – the point at which you’re maximizing volume while staying within your ROI goal. But that takes time,” Coleman said.
“It’s impossible to predict where the optimal bid for a given keyword is, you have to work up (or work down) to it by testing that keyword’s performance at different bid levels. And that optimal point is constantly moving based on how the rest of the market is bidding for that keyword & how your product is converting relative to others.”
It’s a moving target which is why our Amazon Management team is constantly seeking out:
- Keywords that are converting poorly where we can cut wasted spend to improve efficiency, and
- Keywords that are converting well where we can increase bids to get more impressions & hopefully more orders as well.
If you would like to learn more about CPC Strategy’s Amazon Advertising Triangle, email [email protected]