Problem: Assume the following data is from a keyword ad campaign run at Yahoo by a national transmission repair shop AAAGearFixer. You are consulting with them, and they have told you they are only interested in the possibility of ads that run in the top 3 slots.
Tested Keywords:
Exact phrase: transmission
Exact phrase: transmission repair
Exact phrase: bad gears
Assume that a transmission repair yields a contribution margin (that is, price over marginal cost) of $215. The company tends to ignore repeat business.
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Exact phrase
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Searches per month
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Click Through rate: Position 1
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Click Through rate: Position 2
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Click Through rate: Position 3
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Conversion rate to service following click
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transmission
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350,000
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3.0%
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1.0%
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0.2%
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1%
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transmission repair
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55,000
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5.0%
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3.0%
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2.0%
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2%
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bad gears
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1,500
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20.0%
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n.a.
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n.a.
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5%
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Assume data is accurate. No ads showing on Yahoo for "bad gears" prior to test.
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Exact phrase
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Max High Bid
Position 1
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Max High Bid
Position 2
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Max High Bid
Position 3
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Max High Bid
Position 4
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transmission
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.75
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.57
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.56
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.52
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transmission repair
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1.00
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.56
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.45
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.37
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bad gears
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No bids
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No bids
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No bids
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No bids
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Actual prices on December 12, 2006. Yahoo bidding tool. Minimum Yahoo bid =.10 for top spot.
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Part 1: If AAAGearFixer buys the top position for each keyword, how many customers will they expect to acquire per month through this channel?
Part 2: If the other bidders do not change their bids, is this the most profitable keyword strategy for AAAGearFixer ?
Part C: Is it a failure of Yahoo's pricing that customer acquisition costs for AAAGearFixer through this online channel seem to be so low relative to customer profitability?
Part D: Assume that adding the "Click to Call" service described in Problem 1 causes an additional 5% of the searchers to place a call and these calls have a 3% conversion rate to new business. Assume the call center can handle 6 calls an hour, regardless of whether the caller becomes a new customer. Due to the skills needed to diagnose a problem, the average wage for the call center worker is $24. Should AAAGearFixer add this feature?