A Model of Individual Keyword Performance in Paid Search Advertising

45 Pages Posted: 27 Oct 2007

See all articles by Oliver J. Rutz

Oliver J. Rutz

Yale School of Management

Randolph E. Bucklin

UCLA Anderson School of Management

Date Written: June 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.

Keywords: Internet, Advertising, Paid Search, Bayesian Methods

Suggested Citation

Rutz, Oliver J. and Bucklin, Randolph E., A Model of Individual Keyword Performance in Paid Search Advertising (June 2007). Available at SSRN: https://ssrn.com/abstract=1024765 or http://dx.doi.org/10.2139/ssrn.1024765

Oliver J. Rutz (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Randolph E. Bucklin

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-7339 (Phone)

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