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A Closer Look at Overture's Auto Bid System

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Overture's Auto Bid program is designed to ensure that you do not pay more a penny more than necessary to get the top position for your search terms, but you need to understand the subtleties of the program to avoid unpleasant surprises.

Some readers expressed confusion about a comment in October 17th's SearchDay article, "Perfecting Paid Search Engine Listings," regarding Overture's Auto Bid feature. The article suggested that Auto Bid might leave advertisers in the number one position vulnerable to excessively high clickthrough charges. Today, we reexamine the system and how this might happen, to help clarify things.

Overture changed its system earlier this year to rank web sites based on how much they are WILLING to pay, rather than by how much they actually pay.

The logic of the new system is that you can bid the maximum amount you wish to pay to gain traffic for a particular term, then Overture will get you the top position possible for that term, up to the limit you are willing to pay. Overture will also ensure that you do not pay more a penny more than necessary to get the top position possible. This does NOT mean that you won't pay a penny more than the person is paying below you, however.

Huh? The system is much easier to understand with an example. Let's say there are three advertisers all bidding on a particular word. The maximum amount each is willing to pay is shown below:

Example 1
1 - $0.22
2 - $0.12
3 - $0.05

As you can see, the advertisers are listed in order of what they are willing to pay. The number three person is willing to pay the minimum $0.05 bid and no more, so they cannot jump above the number two person. Similarly, the number two person is not willing to pay beyond $0.12, so they cannot jump above the number one person.

What's important to understand is the prices shown on Overture (and in Example 1) are not what the people actually pay. These are their "Max Bids," but Overture also ensures that you don't pay a penny more to gain the top position possible. This means the amounts actually paid work out like this:

Example 2
1 - $0.13
2 - $0.06
3 - $0.05

The number three person has to pay the minimum of $0.05. The number two person, though willing to pay up to $0.12 is only charged $0.06, because that's all that's necessary to jump above the number three person's maximum bid. Similarly, the number one person is charged only $0.13, because that's all that's needed to be above the number two person.

Some people see this example and immediately wonder why Overture doesn't lower the top bidder's amount to $0.07. After all, that would be a real savings! Unfortunately, a system allowing auto bidding won't permit this.

For example, if the top advertiser was lowered to only $0.07, then the second advertiser -- who is willing to pay up to $0.12 -- would automatically jump above the first. Then the former first advertiser would regain their position, because they are willing to pay up to $0.22. In short, the prices in Example 2 are exactly as low as the Overture system can allow with auto bidding.

A problem with the system is that if you bid an excessive amount, it's possible that an advertiser below you might leave you open to paying too much. Imagine this example, showing max bids:

Example 3
1 - $50.00
2 - $49.99
3 - $0.05

In this case, the top advertiser thinks they will be clever and bid the absolute highest amount Overture will allow, $50.00, believing that the discounting system will never charge them this much. However, the second advertiser -- a competitor -- decides to up their bid to $49.99. This indeed causes the top advertiser to be open to an excessively high charge, as you can see when viewing how much will really be paid:

Example 4
1 - $50.00
2 - $0.06
3 - $0.05

In Example 4, the number two advertiser, though willing to pay up to $49.99 is only charged $0.06, because that's all they need to pay to be above the maximum the number three advertiser is willing to pay. However, the number one advertiser does have to pay $50.00 per click, because that's the amount necessary to say above the maximum the second advertiser is willing to pay.

Certainly it would be nice for Overture to explore some mechanisms to protect advertisers from this type of potential abuse. However, when I asked them about this as part when researching another Overture story earlier this month, the response was that they've seen little of this type of abuse happening, as the auto bidding system has matured.

I'd still like to see some protection in place, but the best protection remains in your own hands. Don't bid more than you can afford to pay! The article below also explores this issue in more depth.

Overture Says Forget CPC, What's Your ROI?
The Search Engine Report, July 1, 2002
http://searchenginewatch.com/sereport/02/07-cpc.html

Up Close With Overture's Bid Management
The Search Engine Update, July 1, 2002
http://searchenginewatch.com/subscribers/articles/02/07-overture.html
For Search Engine Watch members, this article takes a closer look at how bid management works at Overture. In particular, it examines why even though there may still be "cost gaps" between bids, this is unavoidable in a system designed to allow auto-bidding.

Perfecting Paid Search Engine Listings
SearchDay, October 17, 2002
http://searchenginewatch.com/searchday/02/sd1017-paid-links.html
Many companies are already "buying their way to the top" of search engines. Most of these advertisers are now focused on optimizing their campaigns to improve traffic and conversion rates.

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