Integrating Keyword Segmentation and Budget Allocation Decisions in Sponsored Search Advertising: An Exploratory Simulation Study

Budget constrained sponsored search advertisers must decide how to allocate their advertisement budget across ad campaigns and individual keywords. In this paper, a simulation model that integrates the complex issues involved in keyword segmentation and campaign organization is used to evaluate performance of various budget allocation strategies. Using the buying funnel model as the basis for keyword segmentation and campaign organization, we analyze Volume-based, Cost-based, and Clicks-based budget allocation strategies and evaluate their performance implications for different firms. The simulation model is empirically evaluated using four Fortune 500 companies and their keyword data obtained from a leading provider of keyword research technology. The results and statistical analyses show significant improvements in budget utilization using the proposed allocation strategies over a Baseline commonly used in practice. The study offers useful insights into the budget allocation problem by leveraging a theoretical framework for keyword segmentation and campaign management.