Setting Campaign Budgets: Maximizing ROI While Controlling The Risk

Campaign budgets enable advertisers control over campaign-level spend on search engines. Once the campaign spend approaches the set budget, ads show up with lesser frequency, and ultimately ads do not compete in the auctions.

However, this is not the best way to control your budget for two reasons:

(1) If you have hit your campaign budget limit, it means that you are not competing in auctions for part of the day and hence are missing out on potentially profitable clicks.

(2) You are paying a higher keyword CPC than necessary to get the same number of clicks. The reason for this is a bit nuanced. When you bid high for a certain keyword(s), Google lets you participate in more auctions with the result that you pay a higher average CPC and also get a higher rate of new clicks.

As a result, your budget is spent quickly, and the campaign caps before the day ends. A lower bid would would to participation in fewer auctions and also get you clicks at a lower CPC. However, since you participate in auctions for a longer period of time, you could potentially get the same or even greater number of clicks at a higher CPC.

The profit of a keyword, ad group or campaign can be represented as:

Profit = (RPC – CPC) x Clicks 

Where RPC Is The Revenue Per Click

Hal Varian, Google’s chief economist, has shown that  RPC is position independent. Thus, a lower bid will not lead to lower RPC. However, a lower bid leads to a lower CPC and hence more profit if the number of clicks are the same. Thus advertisers, especially those maximizing profit, need to pay special attention to campaign caps because this has direct bearing on the performance of their campaigns.

Many advertisers prefer to set very high campaign budget limits. They feel that rather than risking hitting the campaign budget limit and losing out on profitable clicks it is best to keep the campaign budgets very high and then find the right keyword level bid that will enable them to spend on keywords profitably without the hinderance of the campaign budget limit.

While this is the right approach, it can also be dangerous. This example shows why:

For the sake of simplicity, lower numbers have been used to demonstrate the point; but imagine the implications on your overall budget when considering tens of thousands, or even hundreds of thousands to millions of clicks or dollars spent.

Consider three different days or scenarios of campaign performance.

On Day 1, a bid of $1 gets you a 10 cent CPC and 500 clicks by midnight the same day. Since the revenue per click is 20 cents you make $50 in profit. You also did not miss out on potential revenue as the potential clicks that you would have received for the day were the same as the actual revenue.

On Day 2, your campaign hits its limit earlier in the day and as a result you received 50 clicks less than possible. As a result, you lost $5 in potential profit.

On Day 3, however, two things happen. For a slightly lower bid, your CPC jumps to 30 cents due to competition and at the same time, the number of potential clicks jumps to 1000. In this case, the campaign budget limit will kick in quickly and you will only receive 167 clicks before your ads stop showing. In this scenario, since every click is unprofitable, you will make a loss of $16.67. However, the campaign budget limit in this case protected you from an additional loss of $83.33.

Many advertisers only think about the second scenario, eg, potentially missing out on profitable clicks when they set campaign budget limits. However, scenario 3 can and does happen. In highly seasonal retail and travel periods there is a lot of consumer interest and hence higher-than-average traffic.

At the same time, there are more advertisers vying for the same click with the result of rising  CPCs. Thus, if the RPCs are lower than CPCs at this point in time one could lose a lot of money.

How To Set The Right Campaign Budget Limit

I like to think of the campaign budget as your insurance. You don’t want to use it in your daily life, but should something untoward happen it should kick in and protect you from catastrophic loss.

Here are some tips on helping you set the right campaign budget:

1. If you are controlling your spend by controlling the campaign budgets you are probably paying a higher CPC than you need to and are probably not participating in keyword auctions 24/7. Remedy this by finding the right tradeoff of campaign budget and keyword level bid that enables you to get the same traffic and also participate in auctions all day.
2. If you have very high campaign budgets and are not hitting the caps, I would recommend setting a budget that is a multiple of the daily average spend. In this case, if your campaign spend is say $100 on average, you can set a campaign budget of $150 or $200. In this case, the worse case spend multiple is 1.5 times more than expected. Again, the multiple depends on your risk appetite.
3. In periods of high seasonality or short term spikes –  like Black Friday or Cyber Monday – intra day monitoring of performance would be helpful as it will enable you to understand if the advertising landscape has dramatically changed in the short term and take remedying action quickly if needed.

I hope these tips help you set your campaign budgets wisely – high enough to drive maximum performance but low enough to protect you, should something unexpected occur.