Preferred Cost Bidding allows you to set your bid prices to your average CPC and not your max CPC

You can enable this for both CPC and CPM (site-targeted) campaigns.

This is very useful in three different scenarios:

1. You know your value per keyword. If you have the data that says keyword 1 is worth $4.23, and keyword 2 is worth $3.56, then instead of ‘guessing’ what the max CPC should be, you can set your preferred cost at those actual prices.

2. You want more control over expenditures. When setting max CPC, your click cost can vary widely from day-to-day. With preferred bidding, you have much more control over how much you actually pay for keyword. This makes it so your average spend per keyword should be much more consistent.

3. You don’t want to spend all day reconfiguring bids. Since preferred bidding changes your max CPC behind the scenes to reach your actual bid price, there’s a lot less work in adjusting bids with preferred cost bidding.

How does it actually work?

With preferred cost bidding, you can set your preferred click cost at the keyword or ad group level. Behind the scenes, Google then adjusts what your max CPC should be so that your actual click cost comes out to be in your preferred cost bidding range. (More on quality score and ad rank)

So, the same ad rank formula (ad rank = quality score X max CPC) still applies, just Google is doing an addition algo behind the scenes to determine your max CPC.

Incompatibilities

Since Google needs control over your max CPC in preferred cost bidding, it’s not compatible with a couple of AdWords features:

Ad Scheduling advanced features. Preferred cost bidding works with the normal ad scheduling (which is essentially day parting or showing your ads at specific times of the day and days of the week). However, the advanced version of ad scheduling allows you to automatically change your max CPC at various times by a percentage. This advanced feature is not compatible with preferred cost bidding.

Position Preference. This feature allows you to control which range of positions you wish your ad to show. Since Google is changing the max CPC behind the scenes in position preference to determine your ad rank, this is incompatible with preferred cost bidding which is also trying to change your max CPC.

Will you overpay?

The first negative reactions I heard about this feature is that since you are setting a preferred cost, in times when you could pay less for the top positions, you could easily end up overpaying for ads (i.e. if your bid was $3, and it required you to pay $1 to be in the number one spot, the rumor was Google would charge you $3).

This isn’t true.

Google is still running the ad rank formula for all companies involved in the auction for a single keyword, and the ad discounter still applies as well. Essentially, the ad discounter calculates the values for all companies in the auction process and reduces your actual CPC to the lowest possible CPC you could pay to be in that ad position.

Enabling Preferred Cost Bidding

Preferred cost bidding is another bidding option. In the campaign settings, you’ll first want to ‘view and edit options’ under bidding.

Next, choose from one of the three bidding options:

• Set max limits – default bidding
• Set preferred bids – preferred cost bidding
• Budget optimizer – maximize traffic

Finally, choose how to change your current max CPCs to your preferred cost bids.

Preferred Cost Bidding can be very useful for controlling your ad spend, or for those who really understand the best bid by keyword or ad group.

I’ve been playing with it in a few accounts (it’s still in beta), and have been quite happy with the results so far.

It won’t be for everyone (the advanced ad scheduling being the one incompatibility I hope they fix), however, if you want more control over what you pay per click instead of what you bid per click, then it’s worth taking preferred cost bidding for a spin.