Performance, Profitability, and Growth Flashcards
Scaling budget by performance
With this combination of measurability and control, many businesses may opt for a
a flexible marketing budget that scales upward with good performance.
Best Practice: Even for campaigns that are scalable by performance, we recommend setting your AdWords daily budget at a
at a level low enough to limit your spending if something unexpected happens, like a sudden shift in traffic quality of one of your keywords due to a news event.
A campaign that scales by performance can work for many advertising goals, including:
Selling goods or services directly via an e-commerce site
Generating leads for a sales team
Driving signups for a monthly subscription service
If you can estimate the value of a conversion for your business, a
a scalable budget is worth exploring.
If you can estimate the value of a conversion for your business, a scalable budget is worth exploring.
Campaigns that scale with performance usually meet the following conditions:
You can estimate your conversion value (e.g., you make an average of $50 profit per sale)
You understand how much time is needed before profits will be available to reinvest (e.g., you know that sales leads convert to deals in 3-5 weeks)
Your costs of servicing new customers remain stable or decrease as you grow (e.g., the more customers you gain, the lower the costs of supporting each new customer)
Here are some conditions that can make it more difficult for a campaign to scale with performance:
You have high fixed costs that make it difficult to estimate the profit value of a conversion (e.g. significant manufacturing costs)
You have supply or customer service limitations (e.g., you can’t serve additional customers if you grow)
You have cash flow limitations (e.g., you have a $100 CPA for new signups worth $500 over 5 years)
You have sales tracking limitations (e.g., most of your sales are difficult to track because they’re offline)
Performance, Profitability, and Growth
Understand budget impact on profit Scaling budget by performance Growing a profitable campaign Growth in Practice Improve performance when daily budget is depleted Learning the basics of online budget st
Growing a profitable campaign
To achieve success with AdWords, it’s important to understand when a campaign is profitable and how to help it grow. ROI-driven campaigns generally follow three stages of
growth: testing, growth, and maturity.
Growth in Practice
You can often grow profit more rapidly by identifying
smaller parts of a campaign that are profitable and giving them a separate budget before you’re able to confirm the success of the entire campaign.
When your AdWords daily budget is depleted, it’s often a sign you can
you can improve performance.
Your business objectives will determine the
the best approach to take.
Improve performance when daily budget is depleted
Campaigns that focus on profit
Example: You run a bicycle e-commerce website that measures profitability by using Conversion Tracking.
If your campaign is already profitable, depleting your AdWords budget prevents you from getting
getting additional profitable conversions. You can improve performance by gradually increasing your budget while making sure your campaign remains profitable.
Improve performance when daily budget is depleted
Campaigns that focus on exposure
Example: You own a restaurant, and you’re using AdWords to increase your website’s impressions and visitors.
if you prioritize improving your ad’s position over getting more clicks, depleting your budget is
is normal.
Improve performance when daily budget is depleted
Campaigns that focus on exposure
Example: You own a restaurant, and you’re using AdWords to increase your website’s impressions and visitors.
If you prioritize increasing your clicks over improving your ad’s position, and you find that you’re consistently meeting your daily budget, then this frequently indicates that some of your CPC bids may be
be too high. Testing lower CPC bids may increase clicks while allowing you to stay within your budget.
How to budget strategically by business goal
If your business objectives include maximizing both profit and exposure, you can budget strategically by creating
creating different campaigns for each goal.
Learn the basics of performance-based bidding
When your campaign is focused on performance, it’s important to understand how adjusting your bids impacts each
each performance metric.
Bidding to balance sales volume and profitability
Given that conversion rates don’t vary much with ad position, the following trends are important to remember:
Increasing bids generally results in more conversions at a
a higher average cost-per-acquisition (CPA).
Bidding to balance sales volume and profitability
Given that conversion rates don’t vary much with ad position, the following trends are important to remember:
Decreasing bids generally results in
in fewer conversions at a lower average CPA.
Increasing bids while limited by daily budget generally results in
in fewer conversions at a higher average CPA.
Prioritizing business objectives
In order to achieve your goals most effectively, it’s helpful to prioritize your business objectives. You can optimize your AdWords campaigns to achieve many different goals, but tradeoffs are often necessary.
For example, consider managing a campaign with the following objectives:
Aim for ad positions 1-3
Maximize profit
Maximize conversions
Maximize clicks
Value-per-Conversion
Value-per-conversion is the amount of expected profit or value you gain from each conversion. If you can estimate value-per-conversion for a given product or service, it’s a
a useful benchmark to define the upper limit that you can invest in advertising per conversion before becoming unprofitable.
CPA Targets
CPA targets can be helpful for establishing or maintaining
maintaining profitability, and are usually set below your value-per-conversion.
Example: If a remote-control helicopter sale is worth $50 profit and any CPA below that is profitable, a $10 CPA target can help achieve a consistent $40 profit-per-sale (after advertising costs).
Common ROI targets that are unlikely to maximize profit
Targets decided in advance of a campaign (e.g., “With $50 profit per conversion, $10 is a good target.”) <—- this is just a guess in advance.
Targets based on traditional rules of thumb (e.g., “Ad spend should be 9% of revenue.”) Targets based on other marketing channels (e.g., “E-mail and Search should have the same CPA.”)
Achieving profitability
Knowing how to accurately assess whether a campaign is making or losing money is
s key to success and normally a prerequisite to growth.
If you determine that your campaign isn’t profitable, achieving profitability is often possible by comparing your
cost-per-acquisition (CPA) with your expected profit-per-conversion and adjusting keywords or CPC bids to a profitable point.
How to estimate conversion value
When estimating value-per-conversion, it’s often strategic to factor in things like
like repeat business, word-of-mouth, and lifetime customer value. Factoring in these values can give you the flexibility to bid higher while confidently bidding below your value-per-click.
Let’s look at a fictional business-to-business machinery company named Example Machines to see how this works. Rather than sell directly online, Example Machines uses AdWords to generate leads for its sales team. We’ll factor that in too.
Short-term conversion value for Example Machines
Average deal revenue: $3,000 Profit margin: 45% Leads that convert to a deal: 20% Value-per-conversion (short-term): $270 ($3,000 * 45% * 20%)
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Factoring in word-of-mouth
Example Machines has data showing that for each customer they usually gain 15% in additional business through word-of-mouth. Here’s how we factor that in:
Value-per-lead (short term): $270 Gain from word-of-mouth: 15% Value-per-conversion (+word-of-mouth): $310.50 ($270 * 115%)
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Lastly, Example Machines knows that each new customer makes repeat purchases worth approximately $5,000 in revenue over their lifetime. It’s easiest to factor this into initial deal value.
Average deal revenue: $3,000 Repeat business over lifetime: $5,000 Profit margin: 45% Lifetime profit-per-customer: $3,600 ($3,000 + $5,000)*(45%)
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Then we can factor back in how many leads convert to a deal and word-of-mouth gains:
Lifetime profit-per-customer: $3,600 Leads that convert to a deal: 20% Gain from word-of-mouth: 15% Lifetime value-per-conversion: $828.00 ($3,600 * 20% * 115%)
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How this enables more strategic bidding
Let’s assume 5% of clicks convert to a sales lead and see how this affects our value-per-click:
Value-per-click (short term): $13.50 ($270.00 * 5%) Value-per-click (+word-of-mouth): $15.53 ($310.50 * 5%) Value-per-click (lifetime): $41.40 ($828.00 * 5%)
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