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How to Measure the Impact of Your Paid Ads

Published: May 6, 2014

Author: Jason Bruggemann

Ever had to answer the question of why to run paid ads when organic listings are already strong? There are a couple of metrics that you can calculate to help determine the impact of paid ads. They are the incremental ad click (IAC) percentage and the profitability of paid ads. I have provided information below that helps you find both.
What is IAC?
Google has done studies in the past that aim to measure the value of paid ads with organic listings. While testing, they use a metric called incremental ad clicks (IAC). This metric aims to quantify the impact of paid ads. Here is the definition from a Google study:

“IAC represents the percentage of paid clicks that are not made up for by organic clicks when ads are paused. Conversely, when the campaign is restarted, the IAC represents the fraction of paid clicks that are incremental.”

 When analyzing the IAC, a higher percentage represents more clicks from the paid ads that would not be made up by organic listings. Here’s one example: 100 clicks total were earned when paid ads and organic ads were running – 40 from paid and 60 from organic. When paid ads were taken down, 75 clicks came through organic listings. This represents an IAC of (100-75)/(40-0)=62.5%.
The Setup
To gather the right data, you will need to pause paid ads. The length of time is up to you, but there are a few things to consider:

1. Is performance stable in the previous days that you’re testing against?
2. Will there be any events or holidays that will dramatically alter the data in the upcoming days?
3. Do you and will you have enough data to make a conclusion?

The time period you choose should be stable and have very few outside factors that can directly affect performance, such as holidays, press releases, news, etc. And just with any test, you must make sure you have enough data to draw conclusions.
My Test
I ran a test to determine if there is any cannibalization of organic clicks/revenue from paid ads in Bing. I paused paid ads for seven days in Bing and compared the data to the previous seven days, where there were no outliers from holidays or any other event. My IAC and profit margin on clicks are specific to Bing.
Bing IAC Findings
After analyzing the data I found that 75% of the ad clicks were incremental (IAC), meaning 75% of the clicks to the site would not have occurred without the ad campaign. I also found that the profit margin on clicks exceeded the value of organic clicks – definitely a good sign that Bing is worth running. 
IAC Benchmark and Discrepancies
There are many factors that can influence the IAC. A couple of them include placement of organic listing relative to the paid ad and brand listings – which both can lower IAC. In Google’s study on the incremental clicks impact of search advertising, they determined that from the 64% of companies analyzed had an IAC of 90% or greater. Retail had the lowest average IAC at 87%. Two big discrepancies between my study and Google’s study are the years when they were conducted and the differences of search engines. Google did the study in 2011, and I wasn’t able to find any studies on Bing. Google followed up with another study in 2012 that analyzed the IAC based on the organic listing and found that when the organic listing was as high as position one, the IAC was as low as 50%. When the organic listing dropped between positions 2-4, the IAC increased to as high as 82%.
 Determining Profit of Paid Ads
Google outlined their methodology in determining profitability of paid ads, which I was able to utilize for my test. They were able to determine that if the profit from paid clicks plus organic clicks exceeded the value of the organic clicks alone, then it is profitable to buy search ads. In my data, I was able to determine that our profit margin on clicks exceeded the value of the organic clicks by 0.35 (profit margin on clicks = 0.60 & value of organic clicks = 0.25). This can be found using the following:

Let v be the value of a paid click to the advertiser, c be the cost of a paid click and r be the multiplier indicating the relative value of an organic click to a paid click. If the profit from paid clicks plus organic clicks exceeds the value of the organic clicks alone, it is profitable to buy search ads.

These are not the only metrics to determine if paid ads are worth running. There are other factors to consider, and these metrics only assist in the decision to run the ads.  Still, it is interesting to see the impact of paid ads. And if your numbers don’t provide a strong indication to continue serving paid ads, then you may want to reconsider your paid ad strategy.
(1) D. Chan, Y. Yuan, J. Koehler and D. Kumar. Incremental Clicks Impact Of Search Advertising, 2011. <http://static.googleusercontent.com/media/research.google.com/en/us/pubs/archive/37161.pdf>
(2) D. Chan, J. Koehler, D. Kumar and S. Ma. Impact of Ranking of Organic Search Results on the Incrementality of Search Ads. 19 March 2012. <http://static.googleusercontent.com/media/research.google.com/en/us/pubs/archive/37731.pdf>

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