The Importance of Integrating Inventory into Retail Paid Search

By — 04.27.11

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While managing paid search programs for Amazon.com in 2006, Adlucent discovered that integrating paid search with a retailer’s product inventory leads to dramatic improvements in efficiency and revenue growth. In particular, doing just one straightforward thing—pausing keywords for products that have gone out of stock, and then re-starting them when the product is back in stock—could boost campaign efficiency by as much as 30 percent.

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It’s All About the Conversion Rate

Adlucent was the first agency to offer inventory-triggered pause/start functionality in our Deep Search™ software platform. We implemented this in response to one critical observation: conversion rates approach zero when a customer discovers that the product they’re looking for is out of stock. After all, on the Internet, finding another site from which to buy the same product is always just a few clicks away. Any campaign that drives prospective buyers to a page that won’t convert is a potential waste of ad spend.

Moreover, there’s an opportunity cost. Ad budget could have instead been allocated to driving immediate sales of in-stock products. In addition, running ads for out-of-stock items provides a poor customer experience that erodes brand value and might prevent return visits.

What’s Wrong with Automated Bid Management Systems

Most bid management systems respond to out-of-stock inventory conditions in precisely the wrong way: by progressively decreasing CPCs. In a simplified system CPC can be calculated as:

CPC = (AOV × CVR) ÷ ROAS

Return on ad spend (ROAS) is typically a fixed value specified by the retailer, while average order value (AOV) and conversion rate (CVR) are based on historic performance.

When a product goes out of stock, CVR drops dramatically—usually approaching zero. And when CVR approaches zero in this equation, the CPC approaches zero. But most bid management systems don’t drop the CPC to zero right away. Instead, they look at a rolling window of historic data to determine an average CVR. So, as the CVR plummets, the rolling average slowly decays and so does the CPC. And as the CPC drops, the position, click-through rate, and eventually the keywords all fall off the radar.

This can be a slow process, during which time ad spend is being wasted. More importantly, this results in a tangible drop in revenue. Even if the CVR were significantly reduced but still above zero, it would be a better strategy to re-allocate the small CPC to a better-performing campaign than to continue to try to drive revenue from a poorly-performing one.

There’s a secondary problem with most bid management systems. When an item is again in stock, these systems don’t quickly bring the CPC back up to its original, “correct” level. Rather, in response to rising CVRs, the systems will progressively “bid up” the CPC based on moving window averages. Over time, the CPC should again reach its correct level—but this will only last until the product again falls out of stock, and the cycle repeats. Furthermore, the pool of historic data from which future CPCs are calculated is now clouded by the effects of these cyclic variations in inventory. The fluctuations of CVR based on inventory alone cause dramatic instability in a bid management system.

A Better Approach

The smart solution is true inventory integration. Through a feed or through an API, Adlucent obtains inventory data from retailers several times per day, and pauses or re-starts all keywords related to products with a new inventory status. In an out-of-stock condition, the portion of ad spend that is now freed up is dynamically re-allocated to well-performing campaigns for products that are in-stock. Total spending doesn’t change, but efficiency is maintained and revenue is grown dramatically as advertising dollars are allocated to the best-performing keywords.

In addition to using inventory data to manage paid search campaigns more effectively, Adlucent provides valuable business intelligence back to its clients. For example, Adlucent can tell a retailer which high-demand products are frequently out of stock or are on the verge of going out of stock. This helps retailers determine where there is an opportunity to better match supply and demand. Adlucent can also help retailers identify their most profitable products by factoring in the cost of goods sold (COGS) and advertising expense. This financial modeling can be used to quantify the financial impact of not keeping the highest-margin products in stock.

Adlucent: The Right Choice

Inventory status is one of the most important and yet most overlooked factors in the success of retail paid search campaigns. Automatically pausing campaigns for out-of-stock items has proven to be a highly effective way to use ad spend efficiently and to retain customers. Only Adlucent offers this capability, along with the ability to provide strategic information about inventory to its retailer clients.

3 Responses

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