SSRN 1024765 (2007)
In paid search advertising on Internet search engines, advertisers bid for specific keywords, e.g. “Rental Cars LAX,” to display a text ad in the sponsored section of the search results page. The advertiser is charged when a user clicks on the ad. Many of the keywords in paid search campaigns generate few, if any, sales conversions – even over several months. This sparseness makes it difficult to assess the profit performance of individual keywords and has led to the practice of managing large groups of keywords together or relying on easy-to-calculate heuristics such as click-through rate (CTR). The authors develop a model of individual keyword conversion that addresses the sparseness problem. Conversion rates are estimated using a hierarchical Bayes binary choice model. This enables conversion to be based on both word-level covariates and shrinkage across keywords. The model is applied to keyword-level paid search data containing daily information on impressions, clicks and reservations for a major lodging chain. The results show that including keyword-level covariates and heterogeneity significantly improves conversion estimates. A holdout comparison suggests that campaign management based on the model, i.e., estimated cost- per-sale on a keyword level, would outperform existing managerial strategies.
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