Revised & Updated for 2021
Bidding is arguably the most important determinant in the success and failure of your Amazon advertising efforts. Even the most perfect campaign structure with highly relevant targets has the potential to deliver disappointing performance.
If your bids are too low, you’re likely to miss valuable placements and leave opportunity on the table. If your bids are too high, you’re likely to capture too much traffic at too great of a cost introducing significant inefficiencies.
Understanding the details of how bidding works on Amazon will enable you to implement winning campaigns that achieve your business goals.
What type of cost model does Amazon Advertising utilize for Sponsored Ads?
Sponsored Products, Sponsored Brands, and Sponsored Display each follow a cost-per-click (CPC) (a.k.a. pay-per-click (PPC)) pricing model. As a result, advertisers are only charged when a shopper clicks on their ad. This contrasts with a cost-per-thousand-impressions (CPM) model, which is common for Programmatic and Display (DSP) media buys.
What is a bid?
To serve ads to shoppers, advertisers must compete in an auction by compiling a list of relevant keywords and product targets and submitting bids at the target level. The bid represents the maximum amount an advertiser is willing to pay for a click on the associated ad.
However, the bid amount is not necessarily the amount that is actually paid for the click. The CPC is ultimately decided in the auction and is often less than the stated bid.
How does the Amazon Advertising Cost-Per-Click auction work?
When a shopper searches for products on Amazon, Amazon runs a real-time, CPC auction to determine (a) which ads to serve, if any, and (b) the order in which those ads will be served.
Most CPC auctions follow standard Second-Price Auction rules, which state that the highest bidder only pays $0.01 more than the second-highest bidder.
However, Amazon uses an enhanced Second-Price Auction, which selects and ranks eligible ads by evaluating both the target-level bid, and the relevance to the matched query (likely measured using expected click-through rates and conversion rates although these details are kept close to the vest).
This means that the auction winner may not necessarily need to bid the highest to win the first placement as relevance can introduce a discount factor.
How do advertisers calculate the optimal bid?
At its very core, bidding is a science with many widely accepted principles. Consequently, advertising experts have developed a widely accepted, simplified equation to calculate a bid:
Bid = Max. CPC = Avg. Order Value x Conversion Rate x ACOS Target
This same equation can be expressed in the following way:
Bid = Max. CPC = (Ad Sales / Ad Orders) x (Ad Orders / Ad Clicks) x (Ad Spend / Ad Sales)
And it be can be simplified as follows:
Bid = Max. CPC = (Ad Sales / Ad Clicks) x (Ad Spend / Ad Sales)
Now it’s important to note that every advertising expert has their own ‘secret sauce’. This equation is merely the foundation on which complex bidding algorithms are built. There are tons of underlying assumptions and variables that can be layered in to create an even more robust output.
→ If you need a refresher on the metrics involved in these equations, check out The Definitive List of Amazon Advertising Optimization Terms
What are Campaign Bidding Strategies and how do they work?
In addition to keyword- and product target-level bids, advertisers can select between three Campaign Bidding Strategies at the campaign-level for Sponsored Products and Sponsored Display campaigns.
- Dynamic Bids – Down Only | Amazon will reduce your bid by up to 100% if a click is less likely to convert.
- This is our recommended campaign bidding strategy since it preserves the integrity of your bid as the maximum cost-per-click in line with the efficiency target set for your campaign or ad group. For Teikametrics Flywheel users, this setting is necessary to avoid conflict with the auomated bidder.
- Dynamic Bids – Up and Down | Amazon will raise your bid by up to 100% if a click is more likely to convert and will reduce your bid by up to 100% if a click is less likely to convert. For Sponsored Products, Amazon will not increase bids by more than 100% for Top of Search placements and by more than 50% for Product Page and Other placements.
- While we strongly encourage everyone to evaluate this strategy’s effectiveness for your unique needs, we do not typically recommend this campaign bidding strategy as it generally increases spend and inefficiencies.
- Fixed Bids | Amazon will not dynamically adjust your bid based on the likeliness of a conversion.
- We don’t typically recommend this campaign bidding strategy as there are potential cost reductions and efficiency gains when Amazon can decrease your bid dynamically if its less likely to convert. You may see advertisers leverage this for new campaigns while Amazon is still gathering data.
What are Placement Modifiers and how do they work?
Last, but not least, advertisers can Adjust Bids by Placement (formerly Bid+) for Sponsored Products campaigns using the Placement Report, which contains performance data for each of the following:
- Top of Search (First Page)
- Product Pages
- Rest of Search
After reviewing your performance data, you can then elect to set specific Top of Search (First Page) and Product Page modifiers up to 900%. Note that this modifier is applied in conjunction with your Campaign Bidding Strategy so it’s important to do your due diligence and ensure that you’re not telling Amazon to bid excessively.
How do Campaign Bidding Strategies and Placement Modifiers behave in practice?
To answer this question we need to look at an example. Let’s say we have a keyword with the following settings applied:
Campaign Bidding Strategy: Dynamic Bids – Up and Down
- Top of Search (First Page): +100%
- Product Page: +50%
- Rest of Search: +50%
- Top of Search (First Page): +900%
- Product Page: +400%
As you can see in the visualization above, the base bid itself may not be all that aggressive, but the combination of settings quickly escalates into a situation where a $1.00 bid can turn into a $7.50 bid for Product Page placements or a $20.00 bid for Top of Search placements.
We generally see Top of Search placements delivering higher click-through rates (CTR) and conversion rates, which means you can afford to bid relatively higher on those specific placements while still remaining efficient. However a $20.00 bid may be entirely sustainable, hence the importance of doing your due diligence when leveraging each of these settings in tandem.
Why Doesn’t Set-It-And-Forget-It Work?
A set-it-and-forget strategy all but guarantees long-term disappointment and/or limited growth as the Amazon Advertising ecosystem evolves around us. Changes can manifest in the form of new competitor strategies or different consumer behavior, because of seasonality for example.
Let’s look at an example. Let’s say you’re an advertiser that sells fishing equipment – a highly seasonal category that sees volume ebb and flow as the weather warms and cools. At the beginning of spring, shoppers are excited to get back onto the water and catch a trophy bass.
In this instance, conversion rates will expectedly increase as the shopper is more likely to purchase your product after clicking on an ad. By increasing your bids based on the elevated conversion rate, you ensure that your products remain more competitive in the auction, which will likely translate into greater visibility, higher placements, and more sales.
On the flipside, if bids remained constant, you’d likely be running extremely efficiently albeit on relatively limited sales volume.
Ultimately, bid adjustments need to be made regularly to ensure you’re not over- or under-spending on your ads.
How often should bids be adjusted?
At a minimum, bids should be adjusted whenever there is a statistically significant change in any of the primary inputs (i.e. average order value, conversion rate, etc.).
The challenge for anyone selling on Amazon is that this occurs daily making it extremely difficult for any individual to manually manage bids while also optimizing every other underlying component of an account. Therefore, machine learning and automation are essential for running successful advertising campaigns on Amazon.
Looking to improve your bidding strategy and execution?
Teikametrics Flywheel removes the onerous manual labor of bid calculation. The software algorithmically optimizes bids based on your campaign goals. Never calculate another Amazon ad bid again.