Maximizing SEM Revenue in the New Year, Part 1

It’s a new year, and the CEO has just set some really aggressive revenue targets for each quarter of 2004. If your company is like thousands of other search engine marketers, search engine marketing (SEM) played a significant role in revenue generating last year. You relied on SEM for targeted traffic that converted to revenue and profits, bolstering the bottom line. Now, the CEO’s looking for you to beat your numbers. The marketplace has grown more competitive. How are you going to maximize revenue for 2004?

Maximizing revenue from SEM is simple, right? Just put all your paid-placement listings at number one and go as broad as possible with keywords and engines to capture searchers who are looking for your products or services in a multitude of ways. Then make sure you are using all the appropriate modes of paid inclusion.

Needless to say, that strategy will generate the most revenue… at the highest overall cost.

An all-out campaign’s cost may be far higher than the SEM budget allows. More important, using the all-out, pedal-to-the-metal spending strategy may devastate your business by trading revenue for return on investment (ROI) and profits. Some of the listings in the above scenario will likely deliver revenue at a negative ROI. You get less return on your money than if you had not spent it at all. No one wants negative profit.

Today, let’s look at revenue maximization strategies with a fixed, predefined budget. Next week, we will explore revenue maximization for pure direct marketers with unlimited budgets subject to ROI objectives. Even many almost-pure-play direct marketers with ROI goals have a specific budget allocated to SEM.

Allocating on a Fixed Budget

How do you allocate a fixed budget across the SEM landscape? First, confirm that the primary objective is in fact revenue (as opposed to optimization on profit or unit market share, a blended metric, or specific product mix goals).

Manage the budget based on a daily burn rate. The burn rate is how fast the budget is used. The first mistake some marketers make is telling the engines what their spending cap or burn rate is. Don’t. Instead, use strategy to determine what your burn rate should be, then manage that rate intelligently by revenue. Here’s how.

If your budget has been allocated annually, use all the information at your disposal to determine if there is seasonality to the search traffic. If seasonality exists, it’s often best to proportionally match budget allocation to the seasonality in search inventory.

However, there are additional factors to consider. Factors that would indicate an exception or modification are:

  • If order sizes are counter-cyclical (orders are larger in the off-seasons)

  • If traffic competition is lower in the off-seasons (exposing an opportunity for efficient revenue acquisition)
  • If the traffic conversion rate is significantly higher or lower during the off-seasons (meaning search clicks convert better at some times than others)

After factoring in the seasonality and making adjustments, you should have a monthly SEM budget. Break down the monthly budget into a weekly burn rate or target budget. Then factor inventory or conversion factors that change based on the day of the week (e.g., weekdays or weekends) by adjusting the daily target burn rate.

For example, Firm XYZ has an annual budget of $600,000. Its search inventory, conversion, and order sizes are positive for Q4, so it allocates $300,000 for Q4. Instead of dividing the budget evenly among the three months, Firm XYZ compensates for inventory variations and conversion percentage differences (likelihood to purchase). After compensating for known factors, the firm allocates $80,000 for October, $100,000 for November, and the remaining $120,000 for December. It further divides each month into days to get a daily burn rate and adjusts for day-of-week inventory, revenue, or conversion effects. Now it has a target daily budget or burn rate to manage against.

For most search marketers, the daily burn rate is lower than the total inventory available for each day (with all listings maxed to top positions). The key, then, is making every dollar work as hard as possible to generate revenue. To do so, adjust listings downward, starting with the least efficient (the listings with the lowest return on advertising spend, or ROAS), until the burn rate is in line with the target. Do this for every segment of your campaign simultaneously, and you’ll maximize your revenue. Every dollar allocated to search is working as hard as possible.

To add another layer of efficiency-gaining methods, consider dayparting as well. Dayparting data provides another method of removing the least-efficient campaign elements. Instead of dropping listings based on average ROAS data, pause or lower listings that are less efficient at certain times of day. You’ll conserve the spend for the most efficient daypart.

Ask your boss for the largest possible SEM budget this year. Once the budget is approved, use strategy and technology to stretch that budget as far as you possibly can, maximizing revenue (or whatever your objective). Not only will you get a bigger budget next year, you’ll likely get a raise as well for a job well done.

Next week: maximizing revenue using an unlimited budget.

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