Up Close With Overture's Bid Management

So Overture has finally rolled out its own tool to eliminate "bid gaps," but the new system is really a rip-off, right? After all, there are plenty of gaps that remain!

That was certainly my initial view, but a closer look at the new feature shows this not to be so. It's absolutely true that there are real gaps between the amounts different people pay for positions, but this is a consequence of allowing auto-bidding, another feature many advertisers have wanted.

Let's talk first about the problem of bid gaps. Historically, advertisers with Overture have indicated the fixed amount they were willing to pay to be listed for a particular search term. Those who "bid" more on a term were listed above others competing for that term. However, savvy advertisers in top positions have learned that they must monitor the bids "under" them constantly, to ensure they are not overpaying for a term in case of a price drop.

For example, imagine that the top advertiser on the term "shoes" was paying $1.00 per click, to stay above the advertiser listed in position two, who is paying $0.99 per click. Now let's say that due to changes below the second advertiser, they are able to drop their bid to $0.89. The top advertiser would still continue paying $1.00 per click, or $0.10 more than necessary to stay above the second advertiser.

This situation is commonly referred to as a bid gap, and eliminating them has been a growing worry for Overture's advertisers. Indeed, the company's failure to solve the problem led to birth of several third-party "bid management" tools last year. The best of these tools automatically logged into accounts on behalf of Overture advertisers to adjust for bid gaps.

Overture finally responded to the situation first by granting certain tools "authorized" status in January, then several weeks later introduced a log-in security code to prevent advertisers using "unauthorized" tools from accessing their accounts. Last week's move saw Overture trying to address the bid gap problem with its own internal solution.

The new "Auto Bidding" feature does more than eliminate bid gaps, however. It also allows advertisers to easily increase their bids automatically to gain a better position. Such functionality has previously been reserved to those relatively few advertisers using third-party bid management tools. Using some of these tools, you could set the amount you wanted to pay, then have the tool keep logging in and adjusting your bid as required up to a set amount, to get the position you wanted.

The new system at Overture lets anyone have auto-bidding. Indeed, this is the first time Overture has separated the notion of bidding on a term from the cost you'll actually pay, which in turn is causing some confusion that its bid gap tool isn't really helpful.

Under the old system, things were easy. You set an amount as your bid, and that "bid" was the actual cost you would pay per click. In the new system unveiled last week, this option remains under the new name of "Fixed Bid." However, those making use of the new "Auto Bid" option can choose to set the maximum amount they are willing to pay -- the bid -- while the actual cost they may pay could be less than the bid amount.

Let's use an example right from the Overture FAQ page, to see how this works. Let's say we have three advertisers in total bidding on a term. Each has selected the auto bid option, so the ones choosing to pay the most are listed first. Here they are shown, just as Overture now does, with their "max bids" displayed:

Example 1 1 - $0.22 2 - $0.17 3 - $0.12

Anyone can see the obvious gaps between positions, so how can Overture say that bid gaps have been eliminated? We'll get back to this. In the meantime, the important thing to remember is that the prices shown are simply bids, not the actual cost being paid. So what is that cost? Overture won't show you, though it can be deduced.

For example, if there are only three advertisers, then the last one would only be required to pay the at least the minimum $0.05 fee required by Overture. The cost of the second one will be one cent higher than the "max bid" of the third advertiser, while the first advertiser pays one cent higher than the max bid of the second advertiser. So for the example above, here are the costs, as also illustrated on the Overture FAQ page:

Example 2 1 - $0.18 2 - $0.13 3 - $0.05

But there are still gaps! That's right, there are significant gaps in the costs being paid. For example, the second advertiser is paying $0.13. Since that's only one cent higher than the max bid of third advertiser, this is how Overture claims to have eliminated the bid gap. Nevertheless, there's a "cost gap" of eight cents. Similarly, the first advertiser is only paying one cent higher than the second advertiser's bid (so no bid gap), but there's a cost gap of nine cents.

This led me and others to wonder why Overture didn't go the extra step for advertisers and set the system to eliminate cost gaps, rather than bid gaps. After all, such a move would have change the costs paid in Example 2 to bargain rates like this:

Example 3
1
- $0.07
2 - $0.06
3 - $0.05

The answer is that Overture is trying to make more money for itself, right? No. You cannot forget that some bids also have an auto-bid mechanism working, a mechanism that many advertisers themselves have asked for and which has effectively already been in place for those advertisers using third-party tools. That auto-bid mechanism won't let the cost-ordering situation as shown in Example 3 happen.

Remember, as shown in Example 1, the third advertiser is willing to pay up to $0.12 to have the best position. Even if Overture adjusted everything as shown in Example 3, then the auto-bid feature would jump the third advertiser to the top of the list, since they could move there and still be under their max bid limit. Here's how it starts:

Example 4 1 - $0.08 (original number 3) 2 - $0.07 (original number 1) 3 - $0.06 (original number 2)

It wouldn't stop there. The original number two advertiser said they'd pay up to $0.17 per click, so they'd then jump out of the bottom position. And, the original number one person said they'd pay a maximum of $0.22 per click, so they'd jump up, as well. When all the jumps are done, you are back to:

Example 5 (same as Example 2) 1 - $0.18 2 - $0.13 3 - $0.05

As you can see, you can't eliminate "cost gaps" while also allowing auto-bidding. Interestingly, Overture itself failed to point this out when I talked with them on Friday about why they didn't move to a cost gap elimination model. It's something they should better clarify, if only to help some upset advertisers better understand what's happening and why. (For the record, Overture said that it's feedback about the new system from advertisers has been mostly positive).

While cost gaps can't be eliminated, certainly some advertisers would see no reason why Overture needs to indicate the maximum amount they are willing to pay. If the actual cost paid were shown, rather than max bid, it might prevent prices from being pushed upward.

For instance, go back to Example 2:

1 - $0.18 2 - $0.13 3 - $0.05

If everyone could see these actual prices being paid, then the advertisers "above" might more easily understand that they could adjust their "max bids" so that they could still maintain their positions while paying less. For example, the number two advertiser might realize that they could drop to $0.06. Then the top advertiser would also drop to $0.07, and the pressure to increase bids would be relieved.

Well, maybe not. Let's say the top two advertisers do make this manual adjustment, because they get the ability to easily see the actual costs paid. They go to fixed bids, while the third advertiser says on auto-bid. The line-up then becomes:

1 - $0.08 (original number 3) 2 - $0.07 (original number 1) 3 - $0.06 (original number 2)

Certainly there's a price savings. However, this will only be maintained assuming all the advertisers decide not to keep bidding against each other. But if the old number one thought being listed tops was originally worth paying $0.22 max, then they are likely to up their bid again -- and so on down the line. It's hard to know whether seeing actual costs paid would really make a difference.

I did ask Overture whether it had considered listing actual costs paid, instead of max bids, or both. The answer was that all variations had been tried, but that advertisers tested in focus groups found the alternatives to be confusing. Once the focus group people understood the concept of auto bidding and max bids, it made more sense to them to see max bids.

Another concern that some people may have is that auto-bidding will push prices up. No doubt this will happen in the short term. However, I think in the long-term, we'll see the gaps between "max bids" become smaller. When this happens, it will be easier for people to drop their max bids down in the way that old style bid costs get adjusted. This might bring prices back down.

By the way, Overture said that so far, the vast majority of people are still using old-style "fixed" bids. The company is expecting this will change over time, though it doesn't predict how quickly that will happen or what the ultimate take up will be.

A last major concern I've been hearing is the idea of hurting advertisers who try to come in and dominate a term with a $50 bid, the maximum that Overture will allow. Some advertisers have done this, realizing that they will pay far less, because Overture will discount their bid to only one cent higher than their next competitor. Then you've had some smart competitors deciding to up their max bids to $49.99, causing that $50 person to really get hit with a huge bill while the second-place person avoid such charges because what they pay is in reality only one cent higher than the third place person.

Overture is aware of "isolated" incidents where this has happened but expects it will go away. I'd agree that it should settle out over time. Advertisers should quickly learn that playing games like bidding more than they can afford can backfire with huge costs. But if this doesn't change, then hopefully Overture will step in to ensure somehow that an advertiser is not dominating a term with an absurdly high bid.

In some other news, Overture did not roll out the ability to bid for a specific position as part of the new auto-bidding tools, because though it is a demand, relatively few advertisers are requesting it. It was deemed too complicated to bring out along with the other changes.

Similarly, there's a demand by advertisers to be able to "pause" listings, put them on hold for a temporary period, then restart them when ready. This is something that could come in the future, but Overture wouldn't specify any time frame nor commit to it firmly.

Finally, it might make more sense than ever before to consider using a third-party bid management tool, ironically. This is because I suspect the makers of these tools will begin to better reverse-engineer the true costs that everyone is paying on Overture and try to deliver you both the best position and the best cost. Many of them also offer built-in ROI features, to help you better understand what you are spending.

Overture FAQ: Bidding
http://www.overture.com/d/USm/about/advertisers/dtcfaq_ab.jhtml

Q&A direct from Overture, on the new system

Overture Auto Bidding Tutorial
http://www.overture.com/d/USm/learning/flashframea.jhtml

Pretty neat Flash-demo on how auto-bidding works. You can click on the little boxes under the tutorial, to restart a particular part. Takes about five minutes to watch.

BidRank
http://www.bidrank.com

Formerly called BidRight, BidRank has undergone some changes since I last summarized it. Here's a quick rundown. You can feed listings to Overture via XML. Bid changes can now be made up to 24 times per day, per keyword, rather than 6 times (this is true for other "authorized" Overture bid management tools, as well). It's also been suggested that using BidRank (and perhaps other authorized tools) means that your actual cost per click is shown in Overture's results, rather than the max you are willing to pay. BidRank Plus is a version with support for FindWhat, Kanoodle, Espotting, Ah-ha and Sprinks.

GO TOAST
http://www.gotoast.com

Another authorized bid management tool for Overture, the company acquired rival ClickPatrol.com last month. The tool features ROI tracking capabilities and recently added some support for Google Adwords.

Overture's AutoBid = Fool's Gold
WebmasterWorld.com, June 26, 2002
http://www.webmasterworld.com/forum33/891.htm

Reaction to the new tool, with the negatives focusing on the new gaps that have been created but not following through to understand that you can't have both cost gap reduction and auto-bidding combined.

New system allows you to hurt competition
SearchEngineForums.com, June 26, 2002
http://searchengineforums.com/Forum16/HTML/001205.html

Covers issues about how high max bids could be used against you.

Letter From Australia
The Search Engine Update, June 17, 2002
http://searchenginewatch.com/subscribers/articles/02/06-aussie.html

Last issue, I wrote that we might see Yahoo.com carry ads from Overture's European sites despite the fact that Yahoo Europe has a partnership with Overture-rival Espotting. Now Yahoo.com has begun showing Overture UK ads to those from the UK accessing the site. Overture won't confirm that a deal has been arranged -- so it could be a test, or the press releases may simply not have been written yet.