Think Holistically When Determining Your PPC Budget
Many companies don't worry about their PPC spend as long as they're making money, but columnist Matt Umbro argues that appropriate budgeting is key to a successful campaign.
In many cases, budgeting for PPC programs is undefined. Projections, goals, and other variables (such as seasonality) aren’t given enough thought before a strategy is put in place.
And make no mistake, appropriate budgeting is a key factor when determining your PPC strategy.
A common rationalization I hear is, “As long as we’re hitting goals, we can spend as much as we want.” In a vacuum, this statement seems reasonable — but in PPC, there are many variables to consider. This statement oversimplifies the process and is a detriment to account planning.
Accurate and well-thought-out budget planning is necessary for effective PPC management and ensures expectations are realistic.
Core Budgeting Components
When I discuss budget, I’m looking for clarity on any combination of these metrics according to what is important to the client.
- Spend Efficiency (Spend / Revenue)
- Cost per Conversion
- Return On Investment (Including management fees and margins)
- Average Order Value
For example, let’s say a client is looking for 10% year over year growth. If 2014 revenue was $5 million, then we would expect 2015 revenue to hit $5.5 million.
With more revenue we’re likely going to have to increase spend. What we need to ensure is that our efficiencies will still be acceptable to the bottom line as both of these metrics are increased.
If spend was $1 million in 2014, then our spend efficiency (spend / revenue) would be 20%:
- ($1 million / $5 million) * 100
And our ROI at 400% (assuming spend includes fees and margins):
- (($5 million – $1 million) / $1 million) * 100
We now know that the benchmark is 20% spend efficiency at an ROI of 400%. Thus, we begin running scenarios of efficiency vs. volume. The concern becomes how much efficiency are we willing to (potentially) sacrifice in order to grow revenue by 10% in 2015.
Upon running scenarios, we may determine that we’re willing to spend an additional $200,000 in 2015 to increase revenue by 10% year over year. This additional spend may represent:
- Participation in new platforms
- More aggressive bidding
- Further efforts into various features such as remarketing or shopping
The first bullet point is especially important. Advertisers can only squeeze so much revenue out of various sources. In order to increase revenue year over year, new platforms need to be tested, which also means conceding potentially lower returns initially.
Based upon our scenario, we’ll be spending an extra $200,000 to make $500,000. These numbers by themselves don’t represent a great spend efficiency (40%); but, when looking at the year as a whole, we only increase slightly to 21.8%:
- ($1.2 million / $5.5 million) * 100
While our ROI becomes 358.33%:
- (($5.5 million – $1.2 million) / $1.2 million) * 100
Now that we have our desired growth at acceptable efficiencies, we need to figure out how we will allocate budget monthly.
Review Historical Performance Data By Time Period
Many businesses, especially e-commerce retailers, have a certain amount of seasonality.
For example, Q4 tends to be the busiest time of year, while sales may be down during the summer months. These seasonality trends should be addressed when creating budgets.
Look back at previous years to review the month-by-month breakout of spend and revenue.
Our efficiency goal for 2015 may be 21.8%. However, this metric doesn’t need to be the same every month.
To capture the increase in volume during Q4, we may be prone to accept higher efficiencies during these months, say 23% – 25%. In turn, we will aim for below 20% efficiency during the summer months since demand is lower.
Here’s an example table of how spend, revenue, and efficiency may break out by month.
The breakout above will be unique to each business, but the important point is that it gets us thinking about our overall PPC strategy. Knowing when we can and cannot cut efficiency will help us determine which features to utilize.
If we want to get even more specific, we can break this table down by engine. We can review projections by engine while also showing exactly which platforms will show the lower and higher efficiencies.
Stick To The Plan
Once you’ve reviewed the important metrics and historical data to create a budget plan, make sure you stick with it. Naturally, unexpected issues will arise that are out of your control, but remember that the budget plan is driving the overall goal (in our example the 10% year over year revenue growth).
As an example, we may decide that January, right after the holiday season, is a good time to test a new Display campaign in order to keep awareness up. We expect that our spend efficiency will be higher (especially if we only track the last click).
One of our goals would be to continue growing our remarketing lists in order to convert these past visitors during the upcoming leaner efficiency months. In turn, we may decide to dial down our general Display campaign, as efficiencies are tighter.
You can see how working toward the main goal while knowing budget projections is beneficial. By knowing the seasonality of your business and expected ebbs and flows, you can craft a strategy and know precisely when tasks should and should not be performed.
Effective PPC budgeting involves more than looking at the main goal. Many factors have to be considered while also thinking ahead to what initiatives will be put in place during the upcoming year.
As 2015 budgets begin to develop, make sure all aspects of the PPC program are reviewed while crafting a month-by-month breakdown of what desired metrics will be.