Diminishing Returns in PPC – When Doubling Your Budget Doesn’t Mean Doubling Your Profits
September 15, 2015
“We’ve been cleared for double the budget per month for PPC next year…”
That’s music to an Account Manager’s ears, right? Well, it would be – except it’s generally followed by:
“…and we’ve set goals for twice the revenue to match.”
Oh boy. That could be possible, but it’s also more than likely highly improbable. Most PPC accounts have the bulk of their spend in Google or Bing (with a social engine usually running in third place). Those engines have a lot of volume, so it can be incredibly tempting to make the assumption that increasing spend via AdWords or Bing Ads will result in a continued increase in volume at the same cost-per-lead or acquisition. It’s even easier to make that assumption when the client is less experienced with paid search and its tendencies as a marketing medium.
Put in $100,000 = get 2,000 leads at a $50 CPL…put in $200,000 = get 4,000 leads at a $50 CPL. Hello, logical math! The problem here is that PPC isn’t always a logical beast. You won’t always get the same return on an increased budget in the same campaigns you’re running. We call this the point of diminishing returns. Check out how BusinessDictionary.com defines it:
‘A concept of economics that if one factor of production is increased while the other factors are held constant, the output per unit of the variable factor will eventually diminish.’
Putting that definition in PPC terms: if budget increases and your engine/campaign/network coverage stay the same – the returns on ad spend will start to decline. This isn’t to say gains won’t be found in the way of more sales or leads with increased budget, but what you may or can expect to see is the cost of those incremental volumes to rise.
The nature of PPC in its current form for your brand is such that leads/sales come in from different campaigns, networks or engines at varying costs already. Those then all average together for your fully loaded ROI. With that in mind, it only makes sense that some of those campaigns, networks or engines, could be close to non-profitable lead cost levels already and pushing them further could topple your average CPLs over the goal mark fairly quickly.
Usually what sparks an increased budget conversation, beyond seeing profitable returns, is that the Account Manager can see lost impression share in the account. Lost impression share means potentially lost clicks and conversions, most definitely. You’ll also see a variance in how much impression share is being lost by each individual campaign throughout your current engine coverage and further – whether that share is being lost by budget or rank. Make sure you’re not assuming a 25% lost impression share figure to be 25% lost from each campaign. Look at each one separately and start the deeper dive from where you’re losing the most.
If it’s rank – what you’re spending is only a small contributor in the way of the cost-per-click you’re willing to pay for those terms included in that campaign. A lot of what you could make up there has nothing to do with your daily budget limits and more to do with your perceived relevancy to searchers (i.e. CTRs, Quality Scores, etc.).
Before you jump head first in the budget increasing end of the pool, take a look at your keyword to ad copy to landing page relevancy and see if you can get some of that incremental gain purely from improving how the engine views your relevancy (you’ll be able to earn higher positions and more impressions at the same cost by improving this factor).
Now if it is budget related, take a deeper look at what you’re missing out on. Invest your increased budget in the campaigns or engines with the best margin. This will make it easier to more swiftly increase profits on the new budgets because you’re making more on an individual lead or sale here, even if the overall ROI goes down incrementally across the board.
The next piece to consider is whom you’re competing against for those remaining impressions. If your next-in-line competitor has much deeper pockets than you, they probably have their campaigns set in a way to creep up their per-click bids if you begin to push on them for higher rankings or more of the market share. If their benefit/value statement is great enough, no matter how much more budget you pour in to those terms…they’ll continue to outrank you in the results and you’ll be paying more for (next to) nothing, more than likely. See where these diminishing returns are starting to pile on?
Additionally, let’s say you’re working with an agency that has a flat management structure (i.e. you’re working with one team member on their side for all your PPC efforts), in order to double the budget you may need some expansions to occur just within your current engines. It’s reasonable to assume this expansion needs to happen fairly quickly in order to take full advantage of that budget increase but then that would require the current campaigns to lose some focus if just one person is in charge of all of it.
If you’re just working with one Account Manager, the profitability of what you’re running may slip as expansions occur, decreasing profitability overall with the increased budget. For this reason, try to align yourself with an agency that offers a more in-depth team chart for you with additional team members that your main account management contact(s) can roster on quickly. This aids in efficient and effective expansion without losing sight of the current engine performance.
Now for my last point – you could already be hitting the profitable impression ceiling for your current engines. There is such a thing as exhausting your target audience, even in the big engines. So what do you do then? Well, you expand to new engines…and Hanapin Marketing’s President, Jeff Allen, is going to tell you all about how to manage that process in his post coming up Thursday (got you with the hook!).
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