A winner’s curse occurs when the auction winner pays more for the goods or services that they have won. This happens when the true value is not known. The auctioneer isn’t trying to hide the value of an item. It is the nature of the item.
The oil field explorations are a great example of the winner’s curse in real auctions. Companies bid on oil fields with inaccurate information because it is difficult to know the true value of an oilfield. Overestimating the oil field’s value for development will result in higher bids and a winning bid. This can lead to the winner’s curse, as the oil fields could have a lower value than the money they were paid.
PPC Advertising: Winner’s Curse
PPC marketers are not aware of the dangers of Winner’s Curse. This is because accounting for it is very complicated and requires a deliberate effort in order to understand its true consequences. PPC advertising has a real winner’s curse because it is impossible to quantify the true value of an advertisement.
It is important to first examine how Google AdWords ranks ads in its auction. This will help you understand the curse of PPC advertising winners.
Understanding Google AdWords Ranking
Google AdWords ranks ads based on their maximum cost per click (CPC), and their click through rate (CTR). The CPC determines where the advertisement will appear. Higher CTR also means that the advertisement will be more relevant to people, and therefore will be placed higher. Important note: The CPC used in calculation is not actually the CPC, but rather the maximum CPC. This is the amount you indicate is the highest value for your ad.
Marketing Mistake: Inflated CPC
Advertisers will increase their maximum CPC values, as the maximum CPC value is typically lower than the actual CPC. This is done in anticipation for a lower CPC, but a higher position. A number of AdWord agencies and experts advise clients to inflate their CPCs. They promise higher ad positions for niche keywords. The folly is obvious.
Calculating the Value of Your Money
When you have higher positions, the winner’s curse is in overpriced CPCs. While this may seem paradoxical, it can lead to you reaching your goals. However, you won’t get your money’s worth. This is the problem with the “winner’s curse”. It is usually not obvious and you will find out about it only after you have spent a lot of money. Remember that it doesn’t matter how many advertising spots you have, but whether you get your money’s value through PPC advertising.
CPC inflation is used by multiple advertisers in the PPC advertising market to cause winner’s curse. If an advertiser raises the maximum CPC to $1-2, half a dozen advertisers will also do so. This means that you’ll have to pay more than $1 per ad.
Protecting yourself from the winner’s curse
Therefore, it is important to take data from your marketing strategies in order to calculate your maximum CPC. Do not exaggerate this price. It is important to mention that Google AdWords as well as most advertising CPC programs utilize a Vickrey Auction method. This model allows you to understand why an uninflated CPC is best for your advertising goals. Mathematically, it is clear that bidding at the exact price you believe the product is worth is the best strategy for a Vickrey Auction. Bidding lower than the product’s value is just not optimal. Advertisers can manage their CPC campaigns more effectively if they keep this in mind.