Google Ads Smart Bidding is designed to help you achieve your advertising goals by automatically setting bids for each auction. A core principle behind how Smart Bidding, particularly for strategies like Target CPA and Target ROAS, optimizes your spend is marginal cost optimization. This article explains what marginal cost optimization is, how it benefits your campaigns, and which Google Ads tools can help you manage it.
On this page
- Benefits
- What is marginal cost optimization
- How marginal cost optimization works
- Tools for managing and forecasting
- Key takeaways
Benefits
- Efficient budget use: Your budget is directed towards the auctions with the best potential return at the most efficient cost.
- Improved performance: Helps maximize conversions or conversion value for your given budget and targets.
- Scalability: Allows you to potentially scale your budgets while Smart Bidding continues to seek out cost-effective conversions.
What is marginal cost optimization
Marginal cost optimization is the process of finding the best conversion opportunities at the most efficient cost at any given time. Instead of just aiming for an average cost across all conversions, Smart Bidding constantly evaluates auctions and inventory to prioritize those where it can achieve a conversion (or conversion value) at the lowest possible cost that still aligns with your overall goals (like Target CPA or Target ROAS).
Think of it like this: Smart Bidding is always looking for the "next cheapest" conversion that helps you meet your target. This means it will dynamically adjust bids up or down based on the likelihood of conversion and the estimated cost in each specific auction.
How marginal cost optimization works
Smart Bidding uses Google AI to predict which auctions are most likely to result in a conversion at or better than your target. It analyzes a wide range of real-time signals, such as device, location, time of day, audience, and more.
- Prioritizing efficiency: The system will bid competitively in auctions where it predicts a high probability of conversion at the best cost first.
- Maximizing volume at your budget: Bid strategies like Maximize conversions are designed to spend your full average daily budget to get as many conversions as possible. This means the system will keep bidding until that budget is used, even if the later conversions may cost more than the earlier ones.
- Variable costs: You may see individual conversions costing more or less than your average and vary across conversions and segments. Smart bidding is seeing the best cost across all inventories, rather than trying to hit a uniform average CPA.
- Individual conversions: Some individual conversions may cost more than your target, while others will cost less. Marginal cost optimization means the system secures lower-cost conversions when available, which provides flexibility to sometimes bid higher for other conversions, all while aiming to meet your overall average target (for example, Target CPA) over time.
- Across segments: This cost variation is also normal across different slices of your traffic. For example, you might observe different average CPAs when segmenting by:
- Channel (for example, Search, YouTube, and Display within a Performance Max campaign)
- Device Type (for example, mobile and desktop)
- Ad Format
- Specific Assets
- Audience
- Learning period: Demand Gen campaigns, especially when new or after significant changes, go through a learning period. During this phase, the system explores different auctions and user signals to optimize performance. Temporary fluctuations, including a higher-than-Target CPA, can occur as the algorithm gathers sufficient data. It's recommended to allow at least 50 conversions for the campaign to stabilize and exit this learning phase.
- Dynamic auction environment: The cost of conversions is influenced by live auction dynamics, including competitor activity, seasonality, and shifts in user demand. Google AI will sometimes bid higher to secure valuable conversions when competition is high, always working towards the overall tCPA goal.
- Conversion lag: There can be a delay between when a user interacts with an ad and when a conversion is recorded. Looking at short timeframes might show a higher CPA before all conversions are fully attributed. To effectively evaluate performance, look at your Demand Gen campaign's actual CPA against the average Target CPA over a longer duration (for example, 2 weeks or 2 conversion cycles). The Average Target CPA more accurately reflects what the Smart Bidding system was optimizing towards, considering real-time adjustments and any bid adjustments you may have made.
- CPA stability or reduce overshooting: Bidding accuracy and day-to-day volatility improve at higher conversion volume. This means having a sufficient budget is crucial.
- If a campaign is “limited by budget”, it will undershoot to avoid over delivery. An advertiser who increases their budget in a budget-constrained campaign will therefore observe more overshooting once the budget is large enough that the campaign is no longer “limited by budget”. However, they will also observe much less undershooting, and will be more and more on target on average (summed across multiple days), and less volatile, as volume increases
- If a campaign is not “limited by budget”, then increasing the budget won't do much the campaign was already unable to spend the lower budget. Instead, the campaign would need improvements in higher bid or other areas covered here in our best practices.
Tools for managing and forecasting
While Smart Bidding handles the real-time auction dynamics, these tools help you plan and guide the system:
Target CPA bidding
Using a Target CPA (Cost per action) bid strategy is a direct way to manage marginal costs. When you set a Target CPA, you tell Smart Bidding the average amount you're willing to pay for a conversion.
- Control: While individual conversion costs may vary, Smart Bidding will optimize bids to achieve your desired average CPA over time. This helps ensure that as you increase your budget, the system continues to prioritize conversions around that target cost.
- Scaling: As you raise your budget, Smart Bidding will still aim to find the most efficient ones first, guided by your Target CPA. Some conversions may cost more than your target and some may cost less, but altogether, Google Ads will try to keep your cost per conversion equal to the Target CPA you set.
Performance Planner
Performance Planner is a tool that helps you forecast how changes to bids and budgets might impact your campaign performance.
- Forecasting impact: You can use Performance Planner to see how increasing your budget or changing your Target CPA could affect key metrics like conversions, cost, and average CPA.
- Understanding trade-offs: The tool can illustrate the marginal cost principle by showing how much additional spend is required to gain more conversions, and how that might affect your average CPA. For example, the cost of acquiring additional conversions might be higher as the lowest-cost opportunities are captured first.
- Budget planning: This helps you make informed decisions about setting budgets and targets that align with your business goals and understanding the potential returns at different investment levels.
Key takeaways
- Marginal cost optimization is key to how Smart Bidding maximizes results, focusing on the most cost-efficient conversions first.
- Expect individual conversion costs to vary. The system aims to meet your average target over time.
- Use Target CPA bidding to guide Smart Bidding on your desired average cost-per-conversion.
- Use Performance Planner to forecast the impact of budget and target changes, helping you understand the marginal cost of acquiring more conversions.
