As the competition on Amazon increases, so does the adoption of Amazon Sponsored Products. This means sellers must work harder (and smarter) to stay relevant and sustain advertising spend. Gone are the days of “setting and forgetting” where a static bid price would still generate sales volume. You now need to be as dynamic and responsive in placing bids as you would in setting prices or addressing customer reviews. To do this right, however, you need to understand how Amazon auctions work and the best strategies to outsmart them.
How does the Amazon Sponsored Products Auction Work?
Amazon’s advertising auction is a ‘Second Price’ or ‘Vickerey’ auction. In this type of auction, the winner pays the second highest bid to get a click.
If seller Bob bids $0.50 for a Keyword and seller Alice bids $0.25 for the a Keyword, then when there’s a buyer search term that matches both Keywords, Bob’s ad will show up over Alice’s. However, when a buyer clicks on that Ad, Bob will only pay $0.25 for the click, since that was the ‘second price.’
The best strategy in a Second Price Auction is to bid the true value of a click. A higher bid than the true value will get more clicks and more sales, but may lose money. A lower bid than that will get fewer clicks and less sales, and leave money and sales rank on the table.
What is value-based bidding?
Calculating the true value of a click and offering up that bid in Amazon’s bid auction is called value-based bidding. This means you need to calculate the conversion rate, bidding bandwidth, and cost-per-click to get a sale–for each and every keyword and ad group. Once you have completed this calculation, you have the true value of your bid to offer in Amazon’s auction. Click here for more details on calculating your value-based bid.
Conversion rate 📊
Look back at historical data for a keyword to determine how many clicks it takes to get a sale
Bidding bandwidth 🎚
Determine the max amount you are willing to spend on each click. E.g.: If you are willing to tolerate an ACOS of 40%, you are willing to spend up to $4 of every $10 you make on advertising
Using your conversion rate and bandwidth, determine how much you want to offer up to capture a click.
Of course, not all campaigns are created equal and your bid amount is also going to be affected by your objective for a particular campaign.
If your campaign is intended to launch a new product, you want to make sure you correctly value impressions and clicks and set your bids to generate exposure
As your product picks up traction, you want to make sure you are valuing sales volume and boosting sales rank, and you want to set your bids accordingly.
Once your products and campaigns mature, you may shift your focus to capturing only the most profitable sales. In this instance, it is essential to know the true value of a click, otherwise you will overspend on sales you can’t afford.
Value-based bidding is recommended over the traditional, ACOS-chasing method because it prevents you from over- or under-bidding and helps you better achieve campaign objectives. Click here to learn more about the consequences of over- and under-bidding.
How is value-based bidding different from ACOS-chasing?
To understand the nuances that separate value-based bidding from ACOS-chasing, imagine that you are using two different thermostats to set the temperature in the room to 70 degrees.
The first, ACOS-chasing thermostat measures the temperature in the room and determines that it is 68 degrees. Because 68 is lower than 70, it will increase the temperature by 5 degrees, which now brings the temperature to 73 degrees. The next time the algorithm runs, it will see that temperature is at 73 degrees and bring it down 5 degrees, so you end up back at 68 degrees. With this thermostat, you are going to hover near your target, but not always hit it or do so efficiently.
The smarter value-based bidding thermostat takes into account a lot of external factors. It sees that the temperature is at 68 degrees and then considers factors such as whether or not it’s a sunny day out and whether the windows are open to make gradual temperature changes and get you to your target of 70 degrees. By factoring in these environmental differences, a value-based thermostat is able to make subtle, nuanced changes to the temperature and get you to the desired levels faster. With the second thermostat you are finding the temperature that is just right because it takes into consideration additional factors. This is value-based bidding. Adopting value-based bidding allows you to achieve your ACOS targets faster and more efficiently than ACOS-chasing.
Similar to how a repricer is essential for resellers to stay competitive for the Buy Box, changing your keyword bids through the value-based bidding concept will become the norm for successful Sponsored Products management. There are only a finite number of ways customers search for products and only so many keywords to harvest for each campaign– constant bid changes using true values are going to be the key to capturing market share and maintaining advertising presence in the long term.