Google recently announced the release if its Preferred Cost Bidding model, which is said to be “a new way to manage the costs of your AdWords ads.”  According to the news releases on the subject, the new model will be an effective way for those advertisers who don’t have a whole lot of time to devote to their SEM campaign to manage their spends.  According to Google’s AdWords Help Center, under the preferred cost bidding model, “You select the average price you’d like to pay per click (a preferred CPC bid) or per thousand impressions (a preferred CPM bid). The AdWords system then automatically works to hit this target price.”  This is in contrast to the typical model, where advertisers set a minimum and maximum bid that they are willing to pay for a click. 

So is this change in the cost structure really going to alleviate the need for a close eye on the Google Adwords campaigns?  Perhaps from a cost management standpoint, I will agree.  You tell the system what you are willing to pay per click, and set your maximum daily spend based on your monthly budget.  The system then works to deliver clicks at an average campaign CPC that you initially selected, and your daily budget controls the daily/monthly spend amounts.  It will certainly make it easier to estimate the volume of traffic that the campaign is likely to drive in a given time period.

However, what about all of the other factors that go into the true management of a successful campaign?  Here are a few of the primary thoughts that come to mind which are telling me to be cautious about this new model:

• What about Quality Score?  If one of the factors that influences Quality Score is bid, then there is the potential that your ads will be negatively affected if competitors are placing maximum bids that are above the average CPC you are willing to pay.  And, under the same premise, it is then very likely that if your ad is disabled based on a low Quality Score, you won’t be able to appear on that keyword unless you bid far more than that average CPC you are willing to pay.
• Dictating what the magic CPC should be.  There is a danger here that less savvy advertisers will take an educated guess as to what the CPC should be.  Isn’t the beauty of SEM the fact that you can place bids, gather performance data, optimize creative and landing pages (among other things), increase conversion rate, and then be able to change you bids to still meet or exceed performance criteria?  Unless the average CPC has been determined based on strict knowledge of expected click through and conversion rates, it may not prove to be an effective rate to pay for the traffic.  Additionally, a CPM model is also coming back into play, so advertisers need to be careful about what they are willing to pay for impressions vs. actual clicks.       
• Positioning.  Google has been very vocal about setting positioning expectations when it comes to the Preferred Cost Bidding model.  Under this model, positioning is not taken into account when the system places bids.  Therefore, depending on the competitiveness of the keyword, if advertisers indicate that the average they want to pay for a click is far below what others are bidding, the ad may show within the second page of search results, or even farther down.  While all savvy advertisers realize that SEM is most effective when CPA goals are accounted for in the bid strategy, there also tends to be a rather severe drop in impressions (often leading to a drop in clicks) as ads begin to appear on secondary pages of search results.

I do, however, believe that there are some situations where this model could prove to be beneficial.  For example, many advertisers ask about the importance or even necessity of bidding on branded keywords.  Under this model, the advertiser can dictate what they are willing to pay per click on the branded terms.  Because click through rates are often strong on a company’s branded keywords, a negative impact from quality score considerations is less likely. 

Another instance in which the Preferred Cost Bidding model could be useful is if cost-effective traffic is the primary goal of the campaign.  Advertisers can specify what they are willing to pay per click to their site, and the system can help to manage a consistent rate.  Or, if an advertiser has a limited budget, they can specify a certain desirable CPC to help maximize the traffic volume they receive for that given budget.

As with any new development within the search arena, only time and experience will tell how popular and effective the model will be, and what situations will benefit from a preferred cost bid. And the only way to gain true insight?  TESTING.