How The Amazon PPC Ad Auction Works
Ever wonder why you can't get impressions or clicks for a keyword you are bidding for at the high end of the suggested bid range from Amazon?
In theory in a 2nd price ad auction you should be able to win the auction as long as you are bidding higher than the next highest bidder. For example if you are bidding $3 dollars and the next highest bidder is bidding $2.90 you should win the auction with a CPC (Cost Per Click) of $2.91. It would be nice if Amazons PPC ad auctions were that simple. However this is not the case and there are a multitude of other variables to take into account.
So what else goes into Amazons decision making when picking a winner in the ad auction?
Disclaimer: These are strictly my observations and opinion based on my experience managing Amazon PPC accounts for sellers over the last 5 years. Amazon does not disclose what goes into their algorithm.
Let's Dive In:
There are five components to consider:
- Max Bid Amount
- Ad Quality Score
- Ad Rank Score
- Ad Position
- CPC Calculation
Max Bid Amount:
The max bid amount is what you set your keyword bid level at. This is set either at the keyword level or it could be set using the ad group default bid if no individual keyword level bid has been set. Put simply this is the max you are willing to pay for a click.
Ad Quality Score:
This is the most complex piece of the equation as there could be dozens or even hundreds of factors Amazon considers here. In my opinion these are the biggest factors that make up the Ad Quality Score and can be broken down into two buckets:
Ad Quality Score Components:
User Experience Components:
Product Listing Page Quality
Ad Relevance to the Search Query
Seller Review Rating
Product Review Rating
Shipping Speed (Proximity to customer, Prime vs Non Prime etc)
Amazon Profit Components:
Overall Product Conversion Rate
Search Query Specific Conversion Rate
Expected Click Through Rate
There could still be a dozen other factors that go into this calculation. Ultimately my thoughts are that the biggest components in the Ad Quality Score are to determine the best user experience while also generating the highest possible return for Amazon.
It's important to keep in mind that not all these components are weighted equally either. For example Conversion Rate may be weighted much higher than your product listing page quality or proximity to the customer.
Ad Rank Score:
Your Ad Rank score will be a function of your Max Bid and Ad Quality Score:
Ad Rank Score = Max Bid X Ad Quality Score
Your Ad Rank Score determines the position you finish in the ad auction. The higher the Ad Rank score the higher your position.
CPC (Cost Per Click) Calculation:
The actual CPC you pay takes into account the ad rank of the next competitor in the bid auction. Because of this CPC can vary widely. Ultimately CPC is a derivative of the next best competitors Ad Rank Score and your Quality Score. After determining your Ad Rank, your Max bid is no longer relevant in the CPC calculation.
Here is an example table of how all of this might look in the bid auction:
In the table above you see 5 different advertisers competing in the bid auction.
You should notice a few different things.
1. Advertiser 4 with the highest Max Bid is not winning the ad auction.
2. Advertiser 3 with the highest Quality Score is not winning the ad auction
3. Advertiser 1 who won the ad auction is not paying the most per click.
It's important to keep in mind that this is an over simplified version of everything that is going on. There are still many components that come into play like the ad placement (top of search vs product pages vs rest of search), your bidding strategy (Dynamic Bidding down only vs Up and Down vs Fixed Bids), your placement adjustments etc.
In the most common bidding strategy Dynamic Bidding Down Only, it's important to keep in mind that Amazon is adjusting your bid in real time. This could be for several reasons but things like Campaign History, Keyword Match Type, ad placement, etc could impact your ad rank score after they adjust your bid.
Now if you take this logic and apply it to some of the activity you are seeing in your Campaigns you should be able to connect some dots and get a better understanding of what's going on.
Let's look at a real life example and try and draw some conclusions:
In the table above which advertiser does this scenario most resemble?
This would be a scenario closest to Advertiser 4 in the table above, high bid with low quality score resulting in a high CPC. We can see the suggested bid range is much lower than the advertisers bid as well as the actual CPC they paid. This indicates that the advertisers quality score is very low.
Now one comment on suggested bids: Take these with a grain of salt. Suggested bids are very general. Here is how Amazon defines a suggested bid:
"The bid range is a range of winning bids for most ads in your product category."
This is a pretty wide net as its looking at the product category as a whole and not restricting it to the specific search query. That being said you can still use it as a reference but it's not the be-all and end-all.
I hope this article gives you a new perspective on your PPC and perhaps starts some deeper conversations on the topic. Hopefully one day Amazon will unveil whats actually happening under the hood. Until then we'll continue to ponder.