Last week, we laid the groundwork for a discussion about the portfolio approach to auction-based paid-placement keyword campaign management.
The primary objective of a portfolio-based search engine marketing (SEM) campaign is to maximize the volume (leads, revenue, or orders) given a specific return on investment (ROI) objective. Let’s assume you have one ROI objective for your entire campaign (more about this later), as portfolio campaigns require you set an ROI objective for the campaign, such as cost per action (CPA), cost per order (CPO), or return on advertising spend (ROAS). What ROI metric should you pick for a portfolio strategy?
Let’s review some possible ROI metrics in the context of portfolio campaign management. Fail to understand the difference between your average ROI, breakeven ROI (including negative ROI), and optimal ROI metrics and your portfolio campaign might not perform at peak profitability.
My business partner, David Pasternack, prefers a simple analogy. He likens investing in marketing (SEM or otherwise) to buying money. Each dollar spent should have an appropriate return. Knowledge, measurement, metrics, strategies, and techniques can combine to maximize profit when you invest and manage the right way.
An average ROI metric takes all the keywords and elements of your campaign — good, bad, and ugly — and mixes them into one reported number. As with a hedge fund, you see the results but have little idea how those results were achieved.
Any portfolio average will include high ROI golden nuggets and poorly performing “dogs.” Did the portfolio manager put the dogs in on purpose to increase volume? I hope not. Average metrics can hide the real deal.
At breakeven ROI, campaign (or campaign segment) profit is exactly breakeven. Imagine buying $10 bills for $10 each (eliminating transaction cost of your time). Breakeven isn’t exciting. Any campaign segment performing worse than your breakeven ROI actually loses money (negative ROI). In portfolio management, this can (and does) happen. For every dollar you spend on the negative ROI campaign segment, your marginal (incremental) return on that dollar is negative. Even if you get orders, registrations, or revenue, the incremental revenue is unprofitable.
Imagine buying $10 bills for $11. Are you getting revenue? Yes, but cost exceeds profit on every transaction. You wouldn’t want a portfolio in which, when it could be prevented, some keywords had negative ROI. Negative ROI means lost profit and a failure to use marketing dollars where they get positive ROI (opportunity cost).
Optimal ROI occurs when profit is maximized. This isn’t the same as the highest ROI. It isn’t when volume of orders, registrations, or other actions are maximized. Optimal ROI is the profit-maximizing point at which any attempt to gain more volume through bid increases results in a lower total profit.
Let’s return to the $10 bill example. For a specific auction keyword, you can buy either 1,000 $10 bills for $8 each (position five) or bid more (get a higher position), buying 5,000 $10 bills for $9 each. Profit per transaction is lower at the higher cost and position, but volume grew faster than ROI dropped, so extra volume was the best strategy.
If raising bids again results in the $10 bill costing $9.50 each and volume only went up an extra 500, it’s a bad move. Optimal ROI is the ROI setting for a keyword and campaign that results in the profit maximizing balance of volume and ROI.
You never want any listing at any time to cross the optimal ROI point, even if it generates additional volume. The right position for profit maximization and optimal ROI isn’t static. It can change constantly, based on the competitive landscape, external factors, time of day, and day of week.
Two Common Failures
Failure to achieve optimal profit levels is portfolio-style campaign management’s greatest risk. Unfortunately, too many agencies, internal campaign managers, even search engine reps don’t understand the best portfolio has each keyword listing at its optimal ROI all the time. Campaign managers unaware of best practices often allow some keywords to cross into negative profit. Ouch! To add insult to injury, performance reports hide the negative profit in a successful average ROI metric. If you can’t see the individual results of a campaign at the most granular level, you’ll never know the real deal.
Another common failure occurs when you use the same short-term ROI metric (CPO, CPA, or ROAS) for the entire campaign to simplify it. Don’t oversimplify your business.
Instead, look at the reality of your business. Customers originating from different segments, or “clusters,” of your campaign likely deliver different long-term (or short-term) profit levels. With a loan marketer, some keywords result in approved applications and some keywords drive higher-dollar-value applications (more profit). For a travel marketer, some segments deliver loyal customers who rack up thousands in bookings. Others attract deal shoppers who buy low-profit packages and never return.
If your business has great, good, and bad customers or leads, your true breakeven ROI objective (using short-term data only) should be set by campaign clusters. Using one conversion or ROI goal wastes money and misses the best customers, resulting in a non-optimal campaign. You’d be willing to spend more to get those customers, and chances are you have data to help estimate from which keyword types those customers originated.
Unlike stock markets, in keyword search marketing you can predict, to a great extent, the expected return from a particular price, position, keyword, engine, daypart, creative, and landing page combination. Most pertinent variables are very measurable, and, therefore, the data is actionable through hands-on management by a human or system. To tap search distribution’s full potential, run a broad campaign, which may require automation or constant manual attention.
To manage your campaign this way, analyze your business objectives and consider segmenting your business based on customer value. Set up listing clusters with their own optimal ROI goals. Then use all the data at your disposal to run a truly optimal, profit-maximizing portfolio campaign that doesn’t hide the truth in averages.
Make informed decisions about how to adjust the ROI objectives by cluster. You’ll feel great when you send the CEO a report showing SEM spending, revenue totals, profit, and average ROI. The CEO might not ask for a listing-by-listing accounting of profitability, but you’ll know your campaign is humming along optimally.
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