Warning: The following advise is for advanced paid search marketers only. Attempting to implement this strategy prematurely can result in losing your shirt (and maybe even your job or small business).
One of the things I’ve always found fascinating is the contrast between how paid search budgets are managed by smaller businesses and how they’re managed at the enterprise level.
Small business owners very cost conscious, and for good reason, since their cash flow and credit is typically limited. Therefore, many small business paid search programs are focused on not exceeding budget caps. This often results in paid search programs that develop a bit of tunnel vision in that the main goal becomes getting the maximum number of relevant paid search clicks possible within a given spend budget. So for example, if a company determines that the most they can spend per day is $100, the paid search program is focused on getting the most clicks possible for that $100 expenditure.
That can actually work fairly well to a certain extent, but it’s very different than what typically occurs at the enterprise level.
Enterprise brands that focus on direct response (e.g. lead generation, e-commerce, or trackable brick-and-mortar sales) tend to spend much less time (if any) adhering to a hard budget cap. Instead, they typically take a much more financially nuanced approach.
For starters, enterprise paid search channels (along with most if not all other channels) are viewed through the lens of both historical performance trends and forecasting future performance. In other words, these companies have a very strong grasp on how quickly the program is growing year-over-year and they attempt to use that historical trend data along with other variables to predict how much growth will occur future. So for example, if the company made $50,000,000 in 2009 and $55,000,000 in 2010 and $60,500,000 in 2011, then the company knows that the program has grown by 10% year-over-year for two years in a row. It can now use that information to figure out the amount of growth it should see in 2012.
But that’s really just the tip of the iceberg. These companies will perform similar financial analysis on the spend side of the ledger. In other words, they’ll take steps to understand how much money was spent in prior years and use that to figure out how much should be spent moving forward.
And this naturally leads to the concepts like efficiency and and the point of diminishing returns.
If you know how much you’ve spent and made in prior years (this is year-over-year analysis is often broken down by month) you can figure out how efficient your spend has been (e.g. you made $5 for every $1 you spent) and you can use that information to try and peg the optimal spend allocation and corresponding efficiency level moving forward
This is easier said than done because there are a lot of variables that can impact how your paid search program performs (competitive bidding, conversion rate fluctuations, product assortment, public relations and customer service issues, economic factors, etc.) but the goal is to try and figure out an efficiency level that allows you to make a healthy net profit while also ensuring that you have maximum share of voice (another important metric that many smaller businesses overlook) and grab the maximum amount of revenue available for the given time period.
I know from experience that overestimating how your program is going to perform (e.g. overestimating how increasing spend will impact your efficiency) can result in going beyond the point of diminishing returns and essentially wasting a lot of money. Large organizations can easily absorb this cost because it’s typically a drop in the bucket in the grand scheme of things and can actually help improve future forecasting.
Small businesses typically don’t have the same luxury.
That said, if you do have a bit of a cushion and are looking to take your paid search advertising strategy to the next level, I encourage you to look into the concepts I’ve outlined above. Doing so will help you ensure that you’re not leaving money on the table.