How to Manage Your Paid Search Budget - Search Marketing

If you are like most companies, your paid search budget is one of your largest and most important marketing line items.  Knowing how to manage that spend is critical to not only your growth, but your profitability as well.

In the early days of search, managing budget was easy (or so we all thought).  The Internet was the age of ROI.  “Everything is trackable!” we cried aloud with glee.  My, my how times have changed.  These days, understanding your Return On Ad Spend (ROAS) is more critical and more complicated than ever.

Fear not, however, there are a few key guidelines you can use to help determine the appropriate performance targets for your paid search budget.  To be clear, this list is far from exhaustive.  Each industry and each company has its own unique set of circumstances that need to be taken into account.  However, these guidelines will take you a long ways towards maximizing one of most important investments.

Understand Incrementality

One of the biggest keys to understanding marketing effectiveness is to get a feel for how your various marketing programs interact with one another and your customers.  Marketing programs do not operate in silos.  Email drives affiliate sales; Paid Search drives Direct Load, etc. etc.   Knowing, or at least having a feel for what incremental sales a program delivers is critical to knowing what spend thresholds to set.

There are some great and free tools to use to help you determine this.  You can of course use some of the assisted metrics within Google Adwords itself to give a basic view.  This will help you see conversions that had a paid search impression or click involved in them.  This doesn’t give the full picture, but directionally let’s you know what influence paid search is having on other channels.

Google Analytics is a great tool for understanding incrementality.  Listed under “Conversions/Multi-Channel Funnels” the two reports called Assisted Conversions and Top Conversion Paths are goldmines of free data.  These tools will help you easily visualize all the marketing programs (as long as they are tagged with Google Analytics UTM tags) your customers are interacting with, in what order, and how many times.  You will be amazed at the actual paths your customers take to decide to purchase from you.  Who would think people would click on your paid search ad 7 times in a row (for example) before making a sale?

Seeing and leveraging the most popular paths will help you structure your marketing spend appropriately.  In a recent analysis I did for a retailer, we learned that less than 20% of orders being credited to Paid Search contained only paid search marketing.  The remaining 80+% actually registered as email, affiliates, direct load or some other channel due to relying on last click attribution, yet those transactions also included a paid search click at some point.  This is because paid search tends to be a program that introduces new customers to your brand, leaving other programs to often close the sale.  While you need to be careful to not go too far the other direction and overspend, knowing all the programs that paid search impacts helps you set budgets accordingly and not falsely constrict other marketing channels by being too conservative in your spend.

Understand Cross Device Performance

I’ve witnesses a fascinating phenomenon in many retailers lately.  Many believe their traffic is growing faster than it really is.  They often add up their traffic from desktop, tablet and mobile devices and proclaim success at how much they are growing.  While it is likely true that they are experiencing growth, if for no other reason than the continued growth of Ecommerce, what they often fail to see is that much of this “Growth” is in fact the same person coming to their business multiple times from different devices.

This is something retailers didn’t have to contend with just a few short years ago, or at most they might have to deal with someone shopping from a computer at work and at home.  Now though, customers are often interacting with 3, 4 or even more different devices before making a purchase decision. In fact, a recent study by Deloitte found that 84% of people, who start shopping online on one device, finish their transaction on another device.

Understanding how customers find you on each device type is critical to efficient spend.  Paying good money to be found on a desktop, only to have a customer not able to find you on a mobile device because your paid search program isn’t in good shape, only drives down performance and increases overall cost.

There are many ways to work on closing the cross-device loop.  Perhaps the best is to create value for your customer to log in to your site on whatever device they use.  This helps you tie their sessions and data together in order to leverage your marketing campaigns and spend. Including customer loyalty programs in your brick and mortar stores further closes the loop and puts you in position to capitalize on the value of Omni-Channel marketing.

Even without those tools though, you can take advantage of cross device data through Google Adwords.  Found under “Conversions” in Adwords, the tool is far from perfect, relying heavily on estimations.  However, even having a guide post to understanding potential cross device performance will help ensure you maintain visibility for your customers in all the places they look for you.

Track Your Variable Marketing Profit Contribution

You presumably want to drive profit, not just sales.  This means you should be tracking your spend against the variable profit contribution that each marketing program and sale provides.  While the equation can vary by company, a good rule of thumb is to account for costs that vary with each new transaction.  Typically this involves the cost of goods sold, credit card fees, shipping costs, and even things like a percentage of contact center costs, employee headcount and of course the advertising spend itself.

The simple equation I have found most effective is:

Net Sales – Net COGS – Net Shipping costs = Gross Product Margin (GPM)

GPM – Credit Card Fees – % General Administrative Expense – Advertising Cost = Variable Marketing Contribution (VMC)

By then taking Variable Marketing Contribution and dividing it by the number of transactions attributed to a program, you get a target cost per order that you can manage to.  As long as the resulting VMC is above the level you need to be profitable as a company, you are reasonably safe to continue investing, as each new transaction will add profit to your business, not just top line sales.

Understand Customer Life Time Value

A big mistake many retailers make is managing their programs off of an individual order.  If you are like most brands, your goal, and hopefully your reality, is that customers will purchase from you more than once.  Making paid search performance decisions off of a single order in isolation can severely limit your potential to acquire new customers.

A good practice is to determine the lifetime value of your customers.  That is to say, after they make their initial purchase from you, how much revenue and profit are you likely to get from them in the future?  The time threshold you track should vary by business, but most will track this over a 1-3 year period.

A great exercise is to then determine how much of that future profit you are willing to spend to acquire a new customer.  Let’s say your average order value is $100.  Then let’s say the average customer spends $600 with you over the next 3 years, and they do that at a 40% product margin.  This means, after the initial sale, you are likely to make $240 in additional margin over the next three years from the customer.

Now you just need to decide how much of that you are willing to spend to acquire a new customer with similar attributes?  Again, the numbers will vary wildly by company, and they will likely be different based on product groups, the time of year your customer transacts etc. but the methodology will get you to a number you can work with.  Are you willing to invest a year’s worth of incremental margin to acquire a customer?  18 months?  Knowing this gives you a foundational element of setting your cost per order metrics for Paid Search.

Put it all together

The bigger you get, the more sophisticated the tools you can apply to the concepts described above.  Huge, Billion dollar retailers have extremely large budgets and whole teams dedicated to doing the calculations we’ve discussed here.  However, you don’t need to be a huge retailer to get a strong feel for the key performance metrics you can use to drive marketing decisions and compete with the big kids on the block.  By leveraging free tools like Google Adwords and Google Analytics, doing some basic math in Excel and reviewing your customer and merchandising data on a regular basis, you should be able to spend with confidence in paid search.