Part 3: Keyword Bidding Optimization

This exercise is based upon the Columbia case "EveryDay Medical: Keyword Bidding Optimization" available in your course packet. [Use a conversion rate of 1.3% for parts #1 and #2 for each keyword]

1.How much do you recommend EDM bid for each of the three keywords ("rent wheelchair", "rental wheelchair" and "wheelchair rental") given EDM's daily budget allocation of $10?(40 points)

(Hint: Use the attached excel file "HW 5 Data Part 3 EDM .xls" for the analysis to estimate the relationship between your bid for each keyword and the cost per click and clicks per day. Then using these models, formulate an optimization problem that maximizes your expected profits given the budget constraints. You will be using the conversion rate and the profits from conversion figures given in the case study).

2.How much do you recommend EDM bid for each keyword if it does not impose any budget constraint?How does this solution compare the one found in part 1? (20 points)

3.EDM is approached by a website designer who promises to improve EDM's "landing page" and guarantees a conversion rate of 2% (which is significant improvement over the current conversion rate). The designer will charge a one-time fee of $5,000 for the website improvement. EDM management will go ahead with this one time investment if they can recoup this entire amount within a year. Provided that EDM's daily budget allocation for keywords does not change, would you advise EDM to make this investment? Show all your calculations driving your answer.(30 points)