I recently had an interview at a financial services company. One of the questions was how I would optimize PPC bids. Is the analysis below correct or completely way off? Is the math correct? ************************************************************** ************************************************************** Problem: Need to find optimal PPC price for a paid search campaign. Background: Through a past sale, a company sold 100 units when product A was $50. When the price is decreased to $25, the company sold 500 units. For a search campaign, when the company paid $0.80 price per click, it received a total of 200 clicks. When the company increased the PPC to $2.00, it received a total of 1,000 clicks Assumptions: • Conversion rate is 100% • The total PPC cost of the paid search campaign is the only cost the company is concerned about for the paid search campaign. Analysis: Product Price equation: Slope: p2-p1/q2-q1 = 25-50/500-100 = -0.0625 Sub in point (100,50) to find the equation of the line: P – 50 = -0.625(q – 100) P = -0.0625 + 56.25 PPC Price equation: Slope: 2.00-0.80/1000-200 = 0.0015 Sub in point (200, 0.80) to find the equation of the line: P – 0.80 = 0.0015(q – 200) P = 0.0015q + .50 To find the optimal profit point, calculate revenue and subtract cost. Revenue = (Price)(Quantity) Product Price = -0.0625q + 56.25 Revenue = (-0.0625q + 56.25)(q) Revenue = -0.0625q^2 + 56.25q Cost PPC = 0.0015q + 0.50 Profit = Revenue – Cost Profit = -0.0625q^2 + 56.25q – [0.0015q + 0.50] Profit = 0.0625^2 + 56.2485q + 0.50 Take the first derivative to find the optimal profit. 0 = -.125q + 56.2485 0.125q = 56.2485 q = 449.98 Sub q into the PPC price equation: P = 0.0015(449.98) + 0.50 P = $1.175 ************************************************************** Conclusion: The company should not spend more then $1.18 PPC for product A if it wants to maximize profit.
I would say that is some pretty hefty/handy math going on. I usually calculate like this all in my head and I can spit out a good estimate. The only problem is that the adwords world is very "Up and Down". Usually the best way to estimate spending is by actually dropping it into the market for a day or two and seeing what results show up. I would say that is probably a good way to get an estimate for the average joe who can hang KG
Hi, Very thoughtful. Need special brain. Why not making it simple for all to understand without the knowledge of calculus, please. e.g. If price of item= p1=$10/unit Quantity sold=Q1=100 units Price of item=p2=$5/units Quantity sold=Q2=500 units If price is $10 sold 100 units=Total Revenue=$1000 If price is $5 sold 500 units=Total Revenue=$2500 Cost for 100 @.80=$80 Cost for 500@2=$1000 In case1: ROI= 1000-80=$920 In case2:ROI=2500-1000=$1500. In case 2 still profitable. However, these are hypothetical examples, if real data found based on real experience with PPC will be ideal examples for all. Any comment is welcome. Regards,