What happens is, instead of putting in a cost per click, you put in a cost per acquisition. This means, how much you are willing to pay for a conversion (e.g. sale or sign up) on your site.
For example, you maximum cost per click, might be $1. If 1 out of 10 clicks to your sites actually converts, this means that your 'cost per acquisition'(CPA) is $10, because it took 10 x $1 clicks for you to get a conversion.
So, what the optimiser does, is reverse engineer this. You say what your ideal cost per acquisition is, then they figure out, using your conversion rate data for each ad group, what your cost per click for each ad group should be.
This is just automating something that is pretty straight forward. If you have a small account, this is something you could do yourself, and that would be better because you have total control. For larger accounts, this might be more dfifficult, depending on whether you have your own software to help you.
Problems
1. One of the limitations to using the Google Adwords optimiser is that you have to have had 300 conversions in your campaign in the last 30 days for it to be enabled, because they need a good sample of data to estimate your conversion rate. This makes sense, but is not convenient for smaller campaigns, with less than 300 conversions per month.
2. I take anything Google offers with a big cup of salt - as soon as you put a CPA in there, they know how much you want to pay. If you say you are willing to pay up to $20 for a conversion, why would they want to help you get your cost down to $15?
3. Users feedback has shown mixed reviews - sometimes it works and sometimes it doesn't. People have reported increasing CPA.
So, if your account isn't big enough, or you don't want to show Google your cards just yet - try optimising your account yourself!
Do It Yourself
1. Estimate the CPA you are willing to pay. E.g. $20
2. Check out the conversion rates of your Ad groups (making sure you have had a decent number of conversions, not necessarily 300!). Lets say, 5%
3. Your conversion rate x Your Cost per acquisition = Your 'ideal' cost per click
0.05 x $20 = $1.
In this case, your maximum cost per click for that Adgroup should be $1.
This shoudl be monitored closely, because if your conversion rates change, then your costs will change. If you make any changes to your ad group, like new keywords, landing pages or ad content, your conversions are likely to change, and therefore so will your cost per acquisition. If so, your maximum cost per click will need to be recalculated, because it might no longer be appropriate.
