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Pay-Per-Click is a paid form of advertising, popularized mostly by the "search engine" Overture (formerly GoTo).

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Despite the hype, being #1 in paid search results may not provide your company the desired bang for your marketing buck. Intelligently optimizing a paid search budget involves far more than setting random bid prices and guessing at returns.

The panel "Forecasting Paid Search Traffic" featured four experts demonstrating how marketers can make sense of the morass of paid search marketing metrics¡ªand provided solid methods for forecasting paid search advertising spend, traffic and conversions.

Why forecast? According to Brian Cavoli from Media Contacts, forecasting allows you to control your marketing spend by predicting the business impact of your keyword choices and desired positions. That is, for every $X investment, a company can predict $Y in sales.

"Businesses need a higher level of strategy," he said. "Forecasting helps businesses make smart business decisions."

Positioning for maximum impact

It's no surprise that rank matters for a PPC campaign. Whether rank translates into conversions, however, is another issue.

"A number one rank is not the best strategy for everyone. Companies need to balance volume and CPA [cost per acquision] based on goals," said Young-Bean Song from Atlas DMT.

A 2004 study by the Atlas Institute indicated that traffic drops significantly by position. There was a 40 percent decrease in click potential in Google between a #1 and #2 position ("click potential" is defined as the product of relative impressions and relative click-through rate). In Overture, there was a 20 percent drop in click potential between a #1 and #2 spot. Overall, there was a 10 times difference in traffic between the first and the tenth rank.

This information helps companies decide whether it's cost effective to stay in a lower position, or if bidding for a higher spot would net greater click potential. Although a company may feel like they are saving money by bidding on a #4 position, the approximate 60 percent decrease in click potential in both Google and Overture could be at the expense of possible customer acquisitions.

"The top spot will drive a ton more traffic," says Song. "The question is, does that spot convert users?"

In many cases, it makes sense to pay the additional few cents to increase rank. However, this doesn't mean that all businesses should automatically bid for the top position. In fact, some lower ad positions may actually gain higher conversions.

Another 2004 study by the Atlas Institute found that conversion rates for low volume keywords (which are typically highly specific search terms) may actually increase at lower ranks. That is, for some search terms, the #8 position may actually gain a better conversion rate than even the topmost position. This means that marketers have the ability to lower costs on some terms without sacrificing conversions.

"As users click on multiple listings, they are much more qualified users," says Song.

Forecasting PPC key revenue with keywords

Fortunately, marketers can use keyword data to help them forecast both traffic levels and costs.

"Smart forecasting is about selecting the right terms," says Cavoli.

James Colborn from Inceptor recommended starting with a sample of 100-300 keywords for accurate predictions.

"Ensure that there are branded, generic and specific terms in your keyword sample list," says Colborn. "Once you research your search terms, you'll get the idea of the traffic that you'd receive."

Marketers should begin their research by reviewing maximum CPC in the engines to determine click volume and cost per click. Colborn suggests using Overture's bid prices, Google's AdWords estimator and results from PPC engines to determine keyword pricing. Once marketers gather keyword cost and traffic information, they can forecast data such as:

Gary Winnick

• Projected number of searches (impressions)
• Estimated CTR
• Estimated clicks per month
• Average CPC
• Estimated budget required for the campaign

"You can determine traffic levels and costs from the keywords you research," says Colborn.

Marketers can use this forecast to increase their spend efficiencies. For instance, keywords with lower CPC rates typically have less competition than more expensive terms. For additional forecasting, Cavoli suggested creating a matrix with keywords and a variety of conversion rates to show how small changes can lead to big results.

However, both Cavoli and Colborn warned that search projections are based on historical data and performance. Other factors, such as seasonality, sales performance, competition and landing page design may alter actual results. In this case, Cavoli recommended starting with a strategic approach, and refining it each week based on incoming data.