There is a constant battle between efficiency and volume in paid search programs. Early last month, Google released its attempt to help advertisers gain insight into this paradigm from a keyword auction standpoint by releasing the Bid Simulator.
This concept isn't new. Google is actually the second search engine that has attempted to give this data to advertisers.
Yahoo tried to build something similar when it released Panama. This effort was a nice first try, but was largely unsuccessful for a couple of reasons -- because it lacked insight into the incremental CPC and the information was only available in the interface and couldn't be exported via an API.
Google has solved for incremental CPC, but the Bid Simulator doesn't have the ability to export the data. This will probably come soon, and will be the tipping point for this data becoming used on a broader scale.
This is a powerful tool because the search engines know more about any given search query than any advertiser will ever know on their own. For example, Google knows the exact keyword phrase that your keyword appears on, the competitors, their bids, and historical CTRs by advertiser.
This information provides advertisers a better sense for how much more volume can be squeezed from any given term. This includes keywords that may be overbid, or are at the 1.1 position, and can still receive additional traffic.
For now, it's important that SEMs start to become more familiar with the concept of incremental CPC. Bids are increased with the end goal of increasing clicks.
However, people often forget the impact to those clicks that keyword was already getting. This may seem obvious, but the increase in CPC means you're paying more for those clicks you were getting before the bid change. Let's look at an example from the bid simulator:
In the above example, a $0.43 change in maximum CPC yields an incremental 52 clicks, and only changes the actual CPC by $0.32. The cost for each of those "incremental clicks" is $1.59 (change in cost/change in clicks = incremental CPC), and not the $0.32 change in actual CPC.
This is important to note because there is a premium for those clicks that would have been received without the bid change in order to receive those extra clicks. This also translates to the measurement of incremental cost per sale, or any other conversion metrics that any advertiser is measuring to.
This type of analysis is key when establishing budgets, and measuring incremental volume. While the data is still difficult to get to and isn't available for all keywords, this is something to begin getting familiar with and using in your bid management decisions.