Value Based Bidding (VBB)

In the ever-evolving world of digital advertising, Value-Based Bidding (VBB) is an advanced strategy that optimizes bids based on the long-term value of a customer, rather than just short-term actions like clicks or conversions. Unlike traditional bidding models that focus solely on volume, VBB prioritizes high-value conversions, ensuring that marketing budgets are allocated toward users most likely to generate higher lifetime value (LTV).

By leveraging machine learning and predictive analytics, VBB enables advertisers to maximize return on ad spend (ROAS) by bidding more aggressively for prospects with greater revenue potential. This approach helps businesses move beyond surface-level metrics, aligning ad spend with real business outcomes rather than just driving traffic.

What is Value-Based Bidding and How Does it Work?

What is Value-Based Bidding?

It is a method of optimizing ad spend by bidding based on the expected value a customer will bring to your business rather than just clicks or impressions. The focus is not only on immediate conversions but also on maximizing the long-term value of customers.

In e-commerce, for instance, rather than simply bidding for a sale, marketers would bid based on how much they estimate a customer will spend over their lifetime. This ensures that ad dollars are focused on acquiring high-value customers rather than just driving volume.

Value-Based Bidding vs Cost-Plus Bidding

While Cost-Plus Bidding calculates the bid based on the cost of running the ad plus a desired margin, Value-Based Bidding focuses on the customer’s total value. This strategic shift ensures that businesses prioritize their most profitable customers over time.

Value-Based Bidding and Customer Lifetime Value (CLV)

A core principle of Value-Based Bidding is its connection to Customer Lifetime Value (CLV). CLV estimates the total revenue a business can expect from a single customer throughout their relationship.

• Example: In a SaaS business, CLV is critical. A customer might pay $50/month, but over two years, their value grows to $1,200. Value-based bidding ensures that SaaS companies bid appropriately to capture those high-value customers early on.

By leveraging CLV, marketers can make more informed bidding decisions, ensuring their ad spend is geared towards acquiring customers who will bring substantial long-term revenue.

Value-Based Bidding and Conversion Value Optimization (CVO)

Conversion Value Optimization (CVO) and Value-Based Bidding (VBB) are two closely aligned strategies that share the goal of driving higher profitability rather than simply increasing traffic or raw conversion numbers.

CVO is the process of maximizing the total value generated from each conversion. It’s not just about increasing the number of conversions but about optimizing the quality of each conversion to ensure it delivers the highest possible return on investment. In other words, CVO focuses on getting the most value out of your existing traffic, customers, and leads by understanding which conversions are worth more and adjusting strategies accordingly.

Value-based bidding, on the other hand, directly supports this approach by adjusting bids based on the anticipated value of each customer or conversion. With VBB, you are not bidding blindly or equally for every click or impression. Instead, you’re using data to identify which potential customers are more likely to generate higher value over time, based on past behavior, purchase history, or predicted CLV (Customer Lifetime Value).

Here’s how these two concepts work together:

1. CVO focuses on extracting maximum value from conversions. It encourages businesses to look beyond simple metrics like conversion rate and instead consider factors like average order value, repeat purchase likelihood, and long-term customer relationships. The goal is to increase the value of each customer by offering personalized experiences, upselling, cross-selling, or nurturing loyalty.
2. VBB uses that value data to inform bidding strategies. Once CVO helps you understand the characteristics of high-value customers, VBB comes into play by bidding higher for prospects that fit this profile. This ensures that you’re allocating your advertising budget to acquire not just more customers, but the right customers—the ones who will yield the highest lifetime value or contribute most to your revenue.

For example, let’s say e-commerce discovers through CVO that customers who purchase accessories along with main products tend to spend 30% more over time. Armed with this knowledge, they can set up Value-Based Bidding to target individuals who have a history of bundling products or have shown interest in related accessories, bidding more for those high-value conversions.

How to Implement Value-Based Bidding in Google Ads

Implementing Value-Based Bidding (VBB) in Google Ads requires a strategic approach. It’s not just about setting up bids but aligning them with your customer value data to ensure that your ads are reaching the right audience at the right time, for the right price. Here’s a step-by-step guide to getting started:

1. Set Clear Goals and KPIs: Before you even open Google Ads, you need to have clear goals. Are you aiming to increase average order value, optimize for customer lifetime value, or target repeat buyers? Having defined goals will guide the entire setup process.
2. Enable Conversion Tracking: To measure the true value of your conversions, you’ll need to set up conversion tracking in Google Ads. This allows you to track customer actions, such as purchases, lead submissions, or any other key actions. Google will use this data to optimize your bids.
   • Pro tip: Set up enhanced eCommerce tracking or import data from your CRM to get deeper insights into customer behavior and value.
3. Calculate Customer Lifetime Value (CLV) or Assign Value to Conversions: One of the cornerstones of VBB is being able to assign a value to each customer or conversion. This can be done by calculating Customer Lifetime Value (CLV) or by assigning value to different types of conversions, like first-time purchases versus repeat buyers.
   • Example: If your average customer spends $300 over 12 months, you can set this as the value for every conversion Google Ads drives that leads to a new customer acquisition.
4. Set Up Value-Based Bidding Strategy: In Google Ads, you can apply a Target ROAS (Return on Ad Spend) strategy to automatically optimize bids based on conversion value. Google Ads uses machine learning to predict the likelihood of a conversion and the potential value of each conversion, adjusting bids accordingly to maximize your ROI.
   • Navigate to your campaign settings and select “Bidding”.
   • Choose “Target ROAS” as your bidding strategy.
   • Input your target ROAS, which is the return on ad spend you want to achieve (e.g., 400%, meaning you want $4 back for every $1 spent).
5. Feed Google Ads with Historical Data: The more historical data you can provide to Google Ads, the better its algorithm will perform. By uploading offline conversion data or integrating your CRM system with Google Ads, you ensure that Google is working with accurate, up-to-date customer data to inform its bidding decisions.
6. Use Segmentation for High-Value Customers: Not all customers are created equal. By segmenting your customer base, you can identify the most valuable prospects and apply different bidding strategies accordingly. For example, you can bid more aggressively for segments that have a higher lifetime value or are more likely to make repeat purchases.
   • Example: A SaaS company might have two segments—one for free trial users and another for annual subscription buyers. By applying different ROAS targets, they can focus their budget on attracting more high-value, long-term subscribers.
7. Monitor and Adjust Your Bidding Strategy: Implementing VBB is not a “set it and forget it” process. Monitor your campaigns regularly, especially during the initial stages, to ensure that your target ROAS is being met. If your campaigns are underperforming, adjust your ROAS targets or reevaluate how you’re calculating customer value.
   • Example: In an e-commerce business, if you notice that certain products have a higher repeat purchase rate, consider adjusting your bids to prioritize traffic to those products.

By following these steps, you can effectively implement value-based bidding in Google Ads, aligning your advertising spending with the true value of your customers.

Best Practices for Value-Based Bidding

To get the most out of Value-Based Bidding (VBB), it’s crucial to follow some best practices. These will ensure that your campaigns are not only optimized for conversions but also for long-term customer value.

1. Identify and Segment High-Value Customers

One of the most powerful aspects of VBB is its ability to focus on the customers who offer the most value to your business. Instead of simply bidding for clicks or conversions, you should:

• Analyze your customer base to identify key segments that are more likely to offer a higher Customer Lifetime Value (CLV).
• Segment by behavior, such as repeat purchases, high engagement with your brand, or extended product use (in SaaS businesses, for example).
• Use your customer segmentation to guide your bidding strategy, setting more aggressive bids for high-value segments.
  • Example: An e-commerce retailer may find that customers who purchase high-margin products or bundled deals are more valuable in the long run. With this insight, they can increase bids for ads targeting these segments.

2. Use Accurate Data for Customer Value Predictions

A pillar of VBB is the ability to predict customer value accurately. Here’s how you can ensure your predictions are as reliable as possible:

• Leverage historical data: Look at past purchasing behavior, churn rates, and customer engagement to predict future value. If you’ve been tracking Customer Lifetime Value (CLV), this data is gold for your VBB strategy.
• Incorporate CRM data: Integrating your CRM system with Google Ads can help you get more detailed customer insights and track customer journeys more accurately.
• Update your data regularly: Customer behaviors can change over time. Ensure that your value models reflect recent trends in your customer base.
  • Example: A SaaS business might identify users who are more likely to upgrade from a basic plan to a premium one. Using this data, they can increase bids for ads targeting users who have already shown interest in premium features.

3. Optimize Bids Based on Customer Value

Not all conversions hold the same weight. When running VBB, it’s important to ensure that your bidding strategy is optimized based on the value each customer or conversion brings to the business. Here’s how you can refine your approach:

• Apply Target ROAS smartly: Ensure that your Target ROAS is aligned with your actual customer value goals. Don’t just focus on generating more conversions—optimize for the most valuable ones.
• Tailor bids for different stages of the customer journey: For example, bidding higher for customers who are near the end of the sales funnel and lower for those in the awareness stage, unless their potential value justifies higher bids earlier on.
• Use predictive analytics: Tools like Google Analytics or third-party customer insights platforms can help predict which customers are more likely to convert into high-value customers.
  • Example: A B2B SaaS company might place higher bids on leads that are ready for a product demo, as they are more likely to convert into paying subscribers with a higher lifetime value.

4. Regularly Monitor and Adjust Campaigns

Value-based bidding isn’t a one-time setup; it requires continuous monitoring and fine-tuning. To keep your campaigns optimized, follow these practices:

• Review performance metrics regularly: Check if your target ROAS is being met and whether certain customer segments are driving more value than others.
• A/B test different strategies: Test different value-based bidding strategies to see which ones yield the highest return.
• Adapt to changes in customer behavior: Markets and customer preferences shift over time. Make sure your campaigns are agile enough to adjust to these changes.
  • Example: An e-commerce brand may find that certain products have seasonal spikes in demand. By monitoring this data, they can adjust their bids to capitalize on these periods when customer value is at its highest.

5. Don’t Overlook Audience Targeting

While VBB focuses on optimizing bids based on customer value, it’s essential to layer this with precise audience targeting. Here’s how:

• Use detailed audience segmentation: Combine VBB with audience targeting to ensure that your ads are shown to users who are most likely to convert and provide high value.
• Retarget high-value segments: Use retargeting strategies to bring back customers who have already demonstrated high value, such as those who abandoned a shopping cart or engaged with premium content.
• Leverage Lookalike Audiences: In platforms like Google Ads, you can create lookalike audiences based on your highest-value customers, expanding your reach to users who share similar behaviors and characteristics.
  • Example: A B2C subscription service might create a lookalike audience based on its longest-tenured subscribers, thereby attracting potential customers with a higher likelihood of staying long-term.

How Does Value-Based Bidding Stack Up to Classic Bidding Strategies?

Bidding strategies play a pivotal role in ensuring the success of campaigns. However, not all bidding strategies are created equal. Here’s a comparison of Value-Based Bidding (VBB) with classic bidding approaches such as Cost-Per-Click (CPC), Cost-Per-Impression (CPM), and others to highlight the strengths and differences of each.

1. Cost-Per-Click (CPC) vs. Value-Based Bidding

Cost-Per-Click (CPC) is one of the most commonly used bidding models in online advertising. It works by charging advertisers for every click on their ads, regardless of the value of the resulting customer.

• How CPC works: Advertisers bid on keywords and pay each time a user clicks on their ad. It’s straightforward and works well for driving traffic to a website.
• Drawback: CPC treats every click as equal, regardless of whether the user converts or the potential value they bring. For businesses that are focused on high-value customers, this strategy can be less efficient.
• How VBB differs: VBB allows advertisers to optimize their bids based on the value a customer brings after conversion. It focuses not just on clicks but on the quality of conversions, driving more revenue per acquisition rather than simply increasing traffic volume.
  • Example: An e-commerce store using CPC might generate hundreds of clicks for a low-cost product. But with VBB, they could prioritize clicks from users more likely to purchase higher-margin products, improving overall profitability.

2. Cost-per-impression (CPM) vs. Value-Based Bidding

Cost-per-impression (CPM) is a traditional model where advertisers pay for every 1,000 impressions (views of their ad), regardless of engagement or conversion.

• How CPM works: Advertisers are charged based on the number of times their ad is shown, often used for brand awareness campaigns. The goal is visibility, not necessarily clicks or conversions.
• Drawback: CPM campaigns can lead to high ad spend without guaranteed results. You may get your ad in front of thousands of users, but there’s no certainty that those impressions will lead to conversions, let alone high-value customers.
• How VBB differs: VBB flips the focus from impressions to customer value. Rather than optimizing for visibility, VBB ensures that you’re bidding based on the potential long-term value of customers, which makes it a better choice for businesses looking to maximize ROI.
  • Example: A B2B SaaS company using CPM might gain exposure, but with VBB, they can focus on acquiring leads that are more likely to convert into long-term subscribers.

3. Target CPA (Cost-Per-Acquisition) vs. Value-Based Bidding

Target CPA is a bidding strategy where advertisers set a target cost they’re willing to pay for each conversion. Google Ads then optimizes bids to generate as many conversions as possible at or below the target CPA.

• How Target CPA works: It helps advertisers control the cost of acquiring new customers by setting a maximum budget for each conversion.
• Drawback: Like CPC, Target CPA doesn’t account for the value of each conversion. Every conversion is treated equally, even if some customers are worth significantly more over time than others.
• How VBB differs: While Target CPA aims to lower the cost per conversion, VBB goes further by factoring in the lifetime value of the customer, allowing businesses to bid higher for more valuable conversions and optimize long-term revenue.
  • Example: A subscription-based business might use Target CPA to acquire new subscribers. However, with VBB, they could prioritize subscribers who are more likely to renew their subscriptions, improving their lifetime profitability.

4. Maximize Conversions vs. Value-Based Bidding

The Maximize Conversions strategy aims to generate as many conversions as possible within a set budget, automatically adjusting bids to meet this goal.

• How Maximize Conversions works: Google Ads automatically sets bids to help advertisers get the most conversions for their budget, regardless of customer value.
• Drawback: Like Target CPA, this strategy doesn’t account for the long-term value of conversions, focusing solely on conversion volume rather than quality.
• How VBB differs: VBB ensures that you’re not just chasing conversions, but acquiring the customers who will bring the most value over time. It’s about quality over quantity.
  • Example: A B2C retailer using Maximize Conversions may get a high volume of one-time purchases. But with VBB, they can focus on customers who will come back for repeat purchases or spend more on future orders.

5. Maximize Clicks vs. Value-Based Bidding

Maximize Clicks is a bidding strategy that helps advertisers drive as much traffic as possible to their site by automatically adjusting bids to increase the number of clicks.

• How Maximize Clicks works: Google Ads automatically increases bids to generate as many clicks as possible within your budget.
• Drawback: Like CPC, this strategy doesn’t account for the conversion potential or value of the user clicking on the ad.
• How VBB differs: Instead of aiming to drive traffic, VBB focuses on optimizing bids for high-value customers, ensuring that you’re investing in clicks that lead to meaningful results for your business.
  • Example: An e-commerce business using Maximize Clicks might drive a lot of low-intent traffic, while VBB allows them to focus on clicks that result in high-value purchases.

When comparing Value-Based Bidding to traditional bidding strategies like CPC, CPM, or Target CPA, it becomes clear that VBB goes beyond simple conversions or clicks. Instead, it focuses on the long-term profitability of each customer, optimizing bids for the real value that customers bring to your business.

Key takeaways

Value-Based Bidding (VBB) offers a strategic advantage for businesses that want to focus not just on driving traffic or conversions but on acquiring high-value customers. Unlike traditional bidding strategies like Cost-Per-Click (CPC) or Cost-Per-Impression (CPM), which prioritize volume, VBB empowers marketers to optimize for the long-term value of each customer –focus on quality over quantity-. By aligning bids with Customer Lifetime Value (CLV) and Conversion Value Optimization (CVO), businesses can achieve better ROI, sustainable growth, and higher profitability.

Incorporating best practices—such as accurate value prediction, segmenting high-value customers, and optimizing bids based on lifetime value—further enhances the impact of Value-Based Bidding. It’s not just about getting the most conversions but getting the right conversions that will boost your bottom line in the long run.

IMPORTANT: Don’t forget that a crucial part of making VBB work effectively is feeding accurate data into Google’s machine-learning system. The more data Google has on the value of your customers and their behavior, the better it can optimize bids and target the right audience. This continuous feedback loop is essential for maximizing the performance of your campaigns.

Ready to Maximize Conversion’s Value?

If you’re interested in incorporating Value-Based Bidding into your pricing strategy, now is the time to start exploring how it can improve your advertising performance. Get ahead of the competition by focusing on the customers that matter most.