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Exercises

Science-to-Practice Initiative
PROSAD: A Bidding Decision Support System for
PRofit Optimizing Search Engine ADvertising
Bernd Skiera, Nadia Abou Nabout

We thank you for using our teaching material and are more than happy to
receive your feedback. Please write to Nadia Abou Nabout
(abounabout@wiwi.uni-frankfurt.de) or Bernd Skiera (skiera@skiera.de) if
you have any questions or suggestions!

Prof. Dr. Bernd Skiera and Dr. Nadia Abou Nabout, Department of Marketing, Faculty of Business and
Economics, Goethe University Frankfurt, Grueneburgplatz 1, 60629 Frankfurt am Main, Germany, phone
+49-69-798-34649, fax: +49-69-798-35001, emails: skiera@skiera.de and abounabout@wiwi.unifrankfurt.de.

ElectronicCommerce
WS201415
Dr.SonjaGensler

You are the manager of a search engine advertising (SEA) campaign for cell phones and you would like
to know whether your SEA campaigns are successful or not. For this purpose, you would like to analyze
summary data of about 40 keywords for the last 6 weeks (see Excel-sheet Data-40-keywords_Scienceto-Practice_final). You know that each conversion generates a profit contribution of $100.
1.

How profitable is your SEA?

You would now like to know what the optimal bid for a specific keyword is:
For that matter, you use subjective estimates for the price response function as well as the click response
function with a percentage increase in prices per click of 25% (parameter value: 1.25) and a percentage
increase in clickthrough rates of 70% (parameter value: 1.70). You also assume a conversion rate of 2%.
2.

Calculate the optimal bid given the above values.

Unfortunately, you are not sure whether the conversion rate is really 2% because Google has reported an
average clickthrough rate for the US and other Western European countries of 1%.
3.

Use a conversion rate of 1% to calculate the optimal bid. What is the optimal bid now? Why
did it change in that direction?

You know think that it might be worthwhile to also consider the long-term value of the customer to
evaluate the profitability of your keywords instead of the short-term value. Your colleague from the
analytics team tells you that the average customer lifetime value (CLV) at your company equals $750.
Again assume a conversion rate of 1%.

4.

Use the CLV instead of the short-term profit contribution to calculate the optimal bid. What is
the optimal bid now? Why did it change in that direction?

You are fortunate and receive daily data for one of the keywords of the last 3 weeks (see Excel-sheet
Data-1-keyword_Science-to-Practice_final).
5.

How can you estimate the corresponding percentage increases in prices per click and
clickthrough rates using Excel?

Finally you would like to know the profit after acquisition costs for rank 1 to 10 for this specific
keyword. For your calculations, please assume 30.000 searches, a conversion rate of 2%, and a profit
contribution of $100.
2

6.

7.

ElectronicCommerce
WS201415
Dr.SonjaGensler

Using the two percentage increases, please calculate for rank 1 to 10 the CPC and CTR, the
number of clicks and conversions, the profit per conversion before acquisition costs, the CPO
(cost per order or also called acquisition costs per conversion), the profit per conversion after
acquisition costs, the profit before acquisition costs as well as the acquisition costs, and the
profit after acquisition costs.
Please illustrate your results using a graph that includes the profit before acquisition costs as
well as the acquisition costs, and the profit after acquisition costs.

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