For today's Inside AdWords post we have a note from our Chief Economist at Google, Hal Varian. Hal and his team spend most of their time studying the AdWords auction and finding ways to make it more efficient. Today he'd like to share a new tutorial he and his team have put together on how to bid for maximum profitability on AdWords:

Last month we launched a new feature of AdWords called Bid Simulator. Bid Simulator takes some of the guess work out of cost per click (CPC) bidding by estimating the number of clicks or impressions you could have received if you had used a different maximum CPC bid. Today, I thought I would take the opportunity to help you make the most of this new feature by explaining how to use the data from Bid Simulator to maximize the profit from your marketing investment.

In general, when you increase your maximum CPC bid for keywords on search you are able to generate more clicks to your site. This may be because your new bid qualifies you to appear higher up in the Sponsored Links on the search results page, or because your higher bid qualifies your ad to appear in new, more expensive, auctions. The goal for you as an advertiser is to decide whether or not these additional clicks come at a cost that is still profitable for you.

To make this decision, you need to compare your expected value per click to your incremental cost per click. Your value per click is how much a click for a particular keyword is worth to you, on average. Your incremental cost per click is how much extra you are paying, on average, for the extra clicks you are getting from your higher bid. When your value per click is higher than your incremental cost per click it makes sense to increase your bid. On the other hand, if your value per click is lower than your incremental cost per click, you probably want to decrease your bid.

In the following video, I'll show you how to calculate these values, how to interpret them, and how to use the data to maximize the profit from your marketing investment. My team and I are always looking for ways to help make the AdWords auction easier to understand so if you have other topics that you'd like us to address, please leave a comment on the video and we may be able to make it a topic for a future video.

You can also watch the video or read the transcript in our help center: