Is Your Search Advertising Budget Harming Your Results?

Investment banks call me just about every week these days, asking whether our clients’ search budgets are growing or shrinking given the state of the economy.  Their interest is in valuing Google and Yahoo stock, but I’m not sure my responses are terribly helpful to them.

Very few of our clients have set budgets for search.  The vast majority of our clients are retailers, and almost all of those view search as a direct marketing channel with well understood ROI expectations.  How much they spend is therefore a function of market opportunity, not a board room decision.

Granted, many of our clients have been forced to think about top line/bottom line trade-offs, but they’re thinking about those trade-offs as direct marketers do:  what is the incremental ROI on the next X dollars spent in this channel, and how does that compare to other channels?  This is very different than deciding: “We’re going to spend Y dollars on search this quarter”.

I get the sense that our clients are in the minority on this, but I don’t really understand why.

Why would a company keep spending money when the ROI turns south?  “By golly, we’re going to spend this last $10K even if it doesn’t generate a sale!”

Why would a company stop spending money when the ROI is good?  “I know that every time I give you $10 you’ll hand me back $11, but I can only spend so much…”

Neither of these statements make any sense to us.

Targeting ROI with undefined budgets is a fundamentally different approach, and it informs search practices.  Algorithmically, our bid management system was designed to generate the maximum sales/margin or leads without exceeding the client’s efficiency target(s).  Other systems are designed to get the most sales/margin/leads they can from X dollars in advertising.  That’s a different algorithm, and we think the wrong one.

The problem with budgets generally is best illuminated by the specific example of campaign budgets.  One obvious question is: why do I only want to spend X on this collection of ads?  Let’s assume there is a reasonable explanation for that, there is still another question:  if I’m actually hitting these caps am I managing the campaign properly?  The answer to this is pretty clearly “no.” 

Suppose the campaign can only spend $1,000 in a day.  At $1 per click you hit the campaign budget after 1,000 clicks.  Wouldn’t you rather have 2,000 clicks for $0.50 each?  In all likelihood, you’d double your sales on the same spend.  Granted, maybe the ads are in position 7 all day, rather than position 3 for a few hours, but who cares?  Is there any reason to generate less traffic and sales on the same spend?!?  Any time caps are hit, by definition you’ve lost opportunity.  Lower bids to get maximum traffic for the dollars spent.

With that tuning however, you run smack into the first question again:  now that the campaign is more cost effective, why shouldn’t I spend more on it?

Those who can’t shake the budgeting habit often try to pick a budget that will generate the ROI they need, but that’s still backwards.  Why guess at the market opportunity in advance, when you could instead seize the day with flexibility?

A number of our clients have some component of branding in their program, and budgets there certainly make sense.  The more divorced the goals are from profits the more budgets make sense. 

However, for those of you looking to make the most of search in these trying times, consider eliminating fixed budgets as a first step.