The following blog has been written by Gauri Iyengar from Teikametrics.com
As the competition on Amazon increases, so does the adoption of Amazon Sponsored Products. This means sellers must work harder (and smarter) to stay relevant and sustain advertising spend. Gone are the days of “setting and forgetting” where a static bid price would still generate sales volume. You now need to be as dynamic and responsive in placing bids as you would in setting prices or addressing customer reviews. To do this right, however, you need to understand how Amazon auctions work and the best strategies to outsmart them.
How does the Amazon Auction Work?
Amazon’s advertising auction is a ‘Second Price’ or ‘Vickerey’ auction. In this type of auction, the winner pays the second highest bid to get a click.
If seller Bob bids $0.50 for a Keyword and seller Alice bids $0.25 for a Keyword, then when there’s a buyer search term that matches both Keywords, Bob’s ad will show up over Alice’s. However, when a buyer clicks on that Ad, Bob will only pay $0.25 for the click, since that was the ‘second price.’
The best strategy in a Second Price Auction is to bid the true value of a click. A higher bid than the true value will get more clicks and more sales, but may lose money. A lower bid than that will get fewer clicks and less sales, and leave money and sales rank on the table.
What is value-based bidding?
Calculating the true value of a click and offering up that bid in Amazon’s bid auction is called value-based bidding. This means you need to calculate the conversion rate, bidding bandwidth and cost-per-click to get a sale for each and every keyword and ad group. Once you have completed this calculation, you have the true value of your bid to offer in Amazon’s auction.
Conversion rate: Look back at historical data for a keyword to determine how many clicks it takes to get a sale
Bidding bandwidth: Determine the max amount you are willing to spend on each click. Eg: If you are willing to tolerate an ACOS of 40%, you are willing to spend up to $4 of every $10 you make on advertising
Cost-per-click: Using your conversion rate and bandwidth, determine how much you want to offer up to capture a click
Of course, not all campaigns are created equal and your bid amount is also going to be affected by your objective for a particular campaign.
If your campaign is intended to launch a new product, you want to make sure you correctly value impressions and clicks and set your bids to generate exposure
As your product picks up traction, you want to make sure you are valuing sales volume and boosting sales rank and want to set your bids accordingly
Once your products and campaigns mature, you may shift focus to only capturing the most profitable sales. In this instance, it is essential to know the true value of a click otherwise you will overspend on sales you can’t truly afford
Value-based bidding is recommended over the traditional, ACOS-chasing method because it prevents you from over- or under-bidding and helps you better achieve campaign objectives.
How is value-based bidding different from ACOS-chasing?
To understand the nuances that separate value-based bidding from ACOS-chasing, imagine that you are using 2 different thermostats to set the temperature in the room to 70 degrees.
The first, ACOS-chasing thermostat measures the temperature in the room and determines that it is 68 degrees. Because 68 is lower than 70, it will increase the temperature by 5 degrees, which now brings the temperature to 73 degrees. The next time the algorithm runs, it will see that temperature is at 73 degrees and bring it down 5 degrees, so you end up back at 68 degrees. With this thermostat, you are going to hover near your target, but not always hit it or do so efficiently.
The smarter, value-based bidding thermostat, takes into account a lot of external factors. It sees that the temperature is at 68 degrees and then considers things like whether or not it’s a sunny day out and whether the windows are open to make gradual temperature changes and get you to your target of 70 degrees. By factoring in these environmental differences, a value-based thermostat is able to make subtle, nuanced changes to the temperature and get you the desired levels faster. In the second thermostat, you are finding the temperature that is just right considering additional factors. This is value-based bidding.
Similar to how a repricer is essential for resellers to stay competitive for the Buy Box, changing your keyword bids through the value-based bidding concept will be the norm for successful Sponsored Products management. There are only a finite number of ways customers search for products and only so many keywords to harvest for each campaign. Constant bid changes using true values are going to be the key to capturing market share and maintaining advertising presence in the long term.
Teikametrics’ SP Optimizer was developed after over two years of hands-on consulting work helping hundreds of sellers improve their Amazon Sponsored Products performance. After data-mining terabytes of data, Teikametrics partnered directly with Amazon’s API team to build an automated solution to improve advertising return-on-investment – the culmination is the proven automation platform, SP Optimizer.
Using machine learning, the SP Optimizer captures billions of data points to intelligently automate your Amazon Sponsored Product campaigns. Sellers can leverage their wealth of data to take full control of their Amazon advertising. Following a proven playbook, the SP Optimizer reduces inefficient spend, capitalizes on top performers, improves keyword targeting, and adjusts bids automatically; and most importantly: puts hours of time back into your day.
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