Background Info "Impressions" are the number of instances that an online advertisement is displayed A "Click" is an instance of someone clicking on an advertisement Only a fraction of impressions results in clicks An "Order" is an instance of someone making a purchase Only a fraction of clicks results in orders In paid search, for a given search word, the ads for multiple companies may be displayed Ads shown in higher positions on the page result in a greater number of clicks Companies pay a certain $ amount each time a customer clicks on their ad A higher $ per click amount paid by a company gives the company a higher position on the page Scenario You are currently in position 2 of a paid search term, the click-through rate (customer clicks per impression) is 1% and the cost per click is $1.50 You can get into position 1 by paying $2.50 per click. In position 1, you expect a click-though rate of 1.5% In position 3 you would pay $0.50 cost per click, and have a click-though rate of 0.5% Conversion rate (orders per click) once someone clicks is 10% in all 3 positions Our total margin per order (before search costs) is $30 Our goal is to maximize absolute $ profit Questions A) What is the cost per order in position 2? B) What is the cost per order in position 1? C) Which of the 3 positions do you want to be in?

Principles Of Marketing

17th Edition

ISBN:9780134492513

Author:Kotler, Philip, Armstrong, Gary (gary M.)

Publisher:Kotler, Philip, Armstrong, Gary (gary M.)

Chapter1: Marketing: Creating Customer Value And Engagement

Section: Chapter Questions

Problem 1.1DQ

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Background Info
"Impressions" are the number of instances that an online advertisement is displayed
A "Click" is an instance of someone clicking on an advertisement
	Only a fraction of impressions results in clicks
An "Order" is an instance of someone making a purchase
	Only a fraction of clicks results in orders
In paid search, for a given search word, the ads for multiple companies may be displayed
	Ads shown in higher positions on the page result in a greater number of clicks
	Companies pay a certain $ amount each time a customer clicks on their ad
	A higher $ per click amount paid by a company gives the company a higher position on the page


Scenario
You are currently in position 2 of a paid search term, the click-through rate (customer clicks per impression) is 1% and the cost per click is $1.50
You can get into position 1 by paying $2.50 per click. In position 1, you expect a click-though rate of 1.5%
In position 3 you would pay $0.50 cost per click, and have a click-though rate of 0.5%
Conversion rate (orders per click) once someone clicks is 10% in all 3 positions
Our total margin per order (before search costs) is $30
Our goal is to maximize absolute $ profit

Questions
A) What is the cost per order in position 2?
B) What is the cost per order in position 1?
C) Which of the 3 positions do you want to be in?
D) At what click through rate in position 1 are you indifferent between positions 1 and 2?
E) What is the cost per order of the orders you gain by moving up from position 3 to position 2?

Please show all your analysis, and specify any assumptions you make.