AdWords is an auction. You get your ad in front of your customers by bidding on certain keywords. If you bid is high enough and your ad is relevant then Google will be more likely to show the ad in the audience's search results.
One aspect that is often overlooked however is how do you make sure you ad doesn't get shown when you know the audience isn't interested. This is where negative keywords come in, and using them well can generate a big improvement in the profitability of your AdWords campagin.
For example, if your company sells calendars then you would probably bid on keywords such as "calender" or "monthly calendar". But if your calendars are printed, it stands to reason that someone searching for "online calendar" isn't interested in your product. In this case you would include "online", or "online calendar" as negative keywords. This makes sure Google will explicitly prevent your ad from showing against these search terms.
Once you start thinking in these terms a lot of other possible negative keywords may become obvious, what about "Mayan calendar", or "weather calendar", or "calendar girls" (a film from 2003 starring Dame Helen Mirren). Without negative keywords your ad could be showing for all these search terms. If your ad shows for a term that is of little value it means it may not be showing for a term that is of higher value.
For more ideas on possible negative keywords the Keyword Planner is a great place to start. The Keywords Planner is a tool built into AdWords that gives you ideas for new keywords, but equally it can help identify negative keywords. When you do a search for "calendar" you'll see a lot of related phrases that have a decent search volume on them. Some of these will likely give you further ideas for refining your negative keywords list (e.g. "free calendar", "printable calendar", "2012 calendar").
Just for completness we will mention one alternative to negative keywords which is to ensure you only ever use exact match on your keywords. Negative keywords are useful when you are using broad match, or phrase match, for your keywords. These match rules will trigger ads for a much wider range of phrases than just your exact keyphrases, hence the value of filtering these results using negative keywords.
However if you use only exact match then negative keywords are of course redundant. Your ads will only trigger if someone enters exactly the keywords you have specified. If your campaign is focused enough to use exact match then that is great, however many campaigns can benefit from throwing the net wider, and in these cases negative keywords can really help to give you a balance between a broad but targeted campaign.
At Webfuel we have almost a decade of experience in managing and improving AdWords campaigns. If you'd like us to review your campaign, or even manage it on a month to month basis, we are confident we can add a lot of value and improve your return on your AdWords spend. If you'd like to discuss what we can do to help your business please give us call.
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