Setting a Paid Search Budget?

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To budget or not to budget? That's the question marketers and media planners will ask in 2004. Because search marketing is mainly a direct response medium, its cost is tied directly to the acquisition of an order. In other words, I know exactly how much each order costs me, even if a keyword search generates an order over the telephone.


Knowing the exact cost per order gives me the power to convert a fixed advertising cost into a variable cost. Rather than committing a fixed budget to advertising, I can spend more to get more, or less to get less. My ad expense becomes a percentage of my sales price, just like the cost of my goods.


Why should we care that our advertising expense is now a variable cost? Because it allows us to "buy" money. Let's say we sell our product for $100 and we make $20 on every sale. If our cost to get each order is $5, and our gross margin for each order is $20 (I'm leaving out the other variable costs for now), we can literally "buy" $20 bills for $5.


We are limited only by volume causing costs to escalate. Now I ask you, if we can buy $20 bills for $5, why would we limit our media spending? That's like taking orders for a product but putting a fixed budget on the cost of goods. Any orders we take over that volume, we just can't fill - because we assigned a fixed amount for the goods we can purchase. If we can take the orders, let's buy the product to fulfill them. It's a no-brainer. The same is true for our search marketing program.


You don't need a search marketing budget at all. All you need do is determine what cost per order you can live with, and get as many of those orders as possible. You can control volume in search engine marketing, so why not take all the volume you can get while still making money?


But let's say I haven't convinced you. Or you're required to set a fixed ad budget as company policy or for political reasons, such as the CFO not wanting to self-fund the marketing campaign. Then we should discuss how best to allocate that budget across the search engine space.


How do you decide what percentage of your budget each engine - Overture, Google, FindWhat, etc. - deserves? First, you can't decide that at an engine level; second, the percentage of media spending on each should be earned, not allocated. I often talk with advertisers who say things like "Google doesn't work for me" or "I do much better on Overture." Such statements display a fundamental lack of understanding of the power of the search space. It's not the engines that work or don't work, it's the keyword listings on those engines that perform well or poorly.


A particular keyword listing on Overture may not produce orders or leads as well as on Google. Each engine will have listings that pull or don't pull. Even then, you have to define the specific times that those listings pull or don't pull. You can have a listing that pulls during the week but falls off on weekends. To be accurate, we have to go further and say that an individual keyword listing on a particular engine at a specific time pulls or doesn't pull. We cannot honestly say that one engine is more effective than another without qualification.


Thus, assigning a fixed budget to each engine becomes difficult. To do so effectively, we have to determine the listings that work in each engine, figure out what to spend for each listing, add the listing budgets up, lump them together by engine, and then set the engine-specific budgets - hoping all along that the metrics won't change significantly (which they will). Sound difficult? To manage a campaign and allocate budgets efficiently is virtually impossible.


That's why automated systems exist that look at the entire search engine space as one entity and set budgets by individual keyword listing. After all, an engine is an engine is an engine. You shouldn't care where your orders or leads come from as long as they are acquired at or below your target cost.


If you have a fixed budget to allocate, then you want to lower your overall average target cost per customer (or lead), resulting in the biggest bang for your buck. Of course, the tragedy is you are probably leaving revenue and profit on the table if you budgeted rather than managing to an ROI metric.


Now tell me again: Why do you have a budget?


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