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One of the most popular requests SEM agencies get are for campaigns related to conquesting the competition. While bidding on competitors can sometimes be effective, it is usually a mixed bag.
An earlier article on this site touched on relevance in SEM. Price and relevance of course go hand in hand, thanks to Google's overarching interest in providing only the most relevant results, including its advertising. While the type of business a competitor is in might be relevant, the terms and brands most likely are not. In other words, if advertiser A wants to bid on advertiser B's brand-related terms, the odds that advertiser A's website will contain relevant text with advertiser B's branding is very low. Thus, bidding on competitors names and related terms is likely to result in very high costs per click. If an SEM campaign has a limited budget, this practice may rapidly eat right through it.
Shoppers that enter brand names are usually looking for that exact brand. While bidding on competitors may get a few clicks, the CTR will typically be low because most shoppers will bypass the ad in preference to the brand they were actually looking for. Also, bounce rates will be higher for this traffic as many clicks to an ad are likely accidental.
Finally, Google has allowed certain brands to trademark their name and related product names. Therefore, ads used for bidding on competitors simply won't show if the term appears in the ad. Ads that don't contain the keyword searched are seen as less relevant and typically get lower click through rates - which ultimately drives up cost and pushes the ads down below the fold or onto the next page.
Some find success bidding on competitors but most find it to be a money pit practice. What are your thoughts regarding bidding on competitors terms and brands?