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A Seller’s Guide on How Amazon Bidding Works

Everything you need to know about Amazon campaign bidding strategy and a step-by-step bidding guide to dynamic amazon bidding strategies.

Revised & Updated for 2021

High-roller gambling provides a mad rush of adrenaline for some and a sickening, gut-wrenching fear in others. How you respond in the face of high stakes could be a factor in how you were genetically built, how you were raised, and your risk-threshold tolerance. It also could just depend on the night and the circumstance.

Regardless, gambling is really no different when it comes to your Amazon advertising bidding strategy or… well…  almost anything you do as a seller on Amazon. Of course, there are formulas and rules to apply when navigating your Amazon bidding process, but ultimately, it’s all about maximizing your profit while decreasing your spend. And that’s exactly what we’re going to teach you. 

Amazon Advertising is More Complex than Sellers Expect

Bidding is arguably the most important determinant in the success or failure of your Amazon advertising efforts. Even the most strategic campaign structures with highly relevant targets have the potential to deliver disappointing performances. That’s because it’s not a perfect system and getting into the minds of what buyers want, where, and why are not easy questions to answer… regardless of how much you do target-marketing research. 

Take for example bubble wrap. The famous insulator (and possibly most fun poking device among children ever)  was originally supposed to be used as wallpaper.  Yup, you heard that right. Wallpaper. Obviously, it wasn’t successful as a wallpaper brand and they revamped it to work as packaging protectant, but you get the point. You don’t always know what your customers are going to think, feel, or respond to your product, which is why having an effective and unique campaign bidding strategy is so important.

If your bids are too low, you’re likely to miss valuable placements and leave opportunities on the table. If your bids are too high, you’re likely to capture too much traffic at too great of cost, introducing significant inefficiencies.

Understanding the details of how Amazon bidding works will enable you to implement winning campaigns that achieve your business goals.

How Does Amazon Keyword Bidding 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 (projected to be measured using expected CTR and conversion rates – albeit 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 on Amazon 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)

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)

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 “simplified” equation is merely the foundation on which “complex bidding algorithms” are built and many experts follow. There are an abundance of underlying assumptions and variables that can be folded in to create an even more robust and complicated “cheese fondu of advertising”, but the above equations will provide good metrics to assess your spend.

 → If you need a refresher on the metrics involved in these equations, check out The Definitive List of Amazon Advertising Optimization Terms 

What are Amazon Campaign Bidding Strategies and How Do They Work?

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. 
    • 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 automated 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 it’s 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 Influence Amazon PPC Bidding?

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 Amazon 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:To answer this question we need to look at an example. Let’s say we have a keyword with the following settings applied:

Bid: $1.00

Campaign Bidding Strategy: Dynamic Bids – Up and Down 

  • Top of Search (First Page): +100%
  • Product Page: +50%
  • Rest of Search: +50%

Placement Modifiers

  • Top of Search (First Page): +900%
  • Product Page: +400%
Bid (Max. CPC)

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 affords you 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 Amazon ads bidding strategies in tandem.

What is Default Bid in Amazon and 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).

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 flip-side, 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 Amazon bids.

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, automation, and Amazon keyword bidding tools are essential for running successful advertising campaigns.

Looking to Improve Your Bidding Strategy and Execution?

While a night of playing Texas Hodem or Craps may be fun, continually having to manage your amazon bids and PPC ads is both daunting and time-consuming. 

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.