TESTS

Pay Per Click Advertising: Setting an Acceptable Budget

I recently had an intern approach me at work and ask me a question I’ve been asked several times over the course of my career…what is a suitable pay per click advertising budget for this client in their industry (you can insert whatever industry and whatever client name for your purposes)?  Whenever I’m asked that question, I cringe and give the same answer, which I’ll get to a little later after I go through a little background.

Traditionally, marketing in a business (typically established by the finance team) sets the amounts of money that they are willing to spend on the specific units of their business (marketing, operations, etc.).  While that works from an expense standpoint and allows some surety for the finance team, investors and bankers (they crave that surety), it isn’t always the best way to run a business.  Once each business unit has gotten their budget, the marketing team then determines which channels (areas) that they want to spend the money and then apportion the money accordingly. Often times the dollars are distributed with no rhyme or reason…10% to television, 20% to print or 15% to pay per click advertising, etc.

Real world example:  I once worked for a marketing agency that placed me as an on-site representative of their business in the corporate headquarters of a publically traded major electronics and appliance retailer. This retailer had over 230 stores, mostly in the eastern half of the United States.  While working within their marketing department and observing their practices, I saw that they became beholden to their own budgets to the point that they relied on them to make all business decisions, regardless of the positive or negative consequences.  Now, operating that way is a nice thought and does give some of that aforementioned surety, but being beholden to their budget held them back from growing their business.  In fact, it also held them back from maintaining their business which led ultimately to their closing.  Was it exclusively because they managed to a marketing budget?  Probably not, as that particular business had several other leaks, but it was certainly a major contributing factor as they were not able to generate as much new business as they needed to plug (or hide) those other leaks.

I use this story as an example to tie into the intern’s original question.  Setting a budget for pay per click advertising certainly provides a business some certainty on how much is going to be spent in that particular channel.  What it doesn’t do is allow a business to grow at an exponential rate by basing their spend on their return on investment (ROI) model instead of artificially capping their spend at a predetermined value.  The beauty of pay per click advertising is that it is, by design, set up to take the return on investment model and continue to allow an advertiser to spend an infinite amount of money as long as they are meeting their ROI goals.  What is an acceptable ROI?  Well, that’s where the finance people come back into the equation as they will help your business set your ROI goal and then the team handling the pay per click advertising will take it from there and keep spending money to grow the business while meeting (and hopefully exceeding) those goals.  Occasionally, the ROI goals are not met and that’s when you dial back the spending to a number which the business can tolerate without causing irreparable harm to the business.

Real world example:  I once worked for a company that was in the home services industry that set up their entire business (not just their pay per click advertising or their marketing department) on the ROI model.  For the first several years of its existence, it doubled in size every year, to become the largest provider of its type in the ecosystem.  Sadly, once the business matured, it started to deviate from the ROI model and managed more to the budget model.  As one would expect, business started to slow down.  Still profitable overall, but not nearly the monster profit margins they had seen in their earlier years.

My point being when you allow a business to continue to spend and “regenerate” itself with ROI and not tie it down to a particular dollar figure, it can lead to unfettered growth.

So, without further adieu, here’s my answer to the intern’s question:  there is NO SUCH THING as a suitable pay per click advertising budget for a client*.  Industry is irrelevant as well.  

The “budget” should be what you’ve set as your ROI goal.  It shouldn’t be a flat dollar amount that you are planning on spending over a particular time period.  If you set a goal and meet your goal on a consistent basis, you should spend money (and get it back) in perpetuity to drive your business to growth.  That cost uncertainty makes the finance people of the world queasy, but if your business’ ultimate objective is growth and to make as much money as you possibly can within the pay per click advertising channel (or any channel for that matter), the ROI model without a budget is the only way to go. Just know your business has to have the stomach for uncertainty when it comes to spending.  Budgets are evil, especially in pay per click advertising.  Keep that in mind when setting up your next campaign or marketing plan.

*I will point out two caveats and say that this applies only in a business or lead generation type of scenario (brand awareness campaigns are entirely different and work quite nicely in a budget model) and also in a “test” phase where you are exploring new pay per click campaigns, budgets are certainly welcome and encouraged.  A test campaign allows you to find your guardrails of how your campaigns will perform AND also helps you set goals for the business.  But don’t manage your non-test business that way!

AUTHOR

Ryan Melby
Ryan Melby
Director of Marketing Analytics

Ryan Melby is the Director of Marketing Analytics with Valve + Meter Performance Marketing. Ryan has served in a variety of marketing and finance roles throughout his 15+ year career that gives him a unique perspective in the marketing world. While working in finance, Ryan carried a variety of roles around accounting, data reporting creation and analysis and also systems development. While working in marketing, Ryan’s focus has been primarily in operating digital marketing campaigns but also using his finance history to create and analyze reports that focus on traditional and non-traditional marketing channels. Both of these skill sets work hand-in-hand with each other in this data-focused marketing age.