Self-Funding Search Engine Marketing

Self-funding marketing campaigns aren’t a new concept. Yet they’re particularly appropriate for paid search engine marketing (SEM). Campaigns are an investment. Marketers can set budgets and objectives to assure profit. Profitable campaigns are often self-funding. When a campaign segment’s net profit exceeds campaign cost, that segment is self-funding.

At the Advanced Search Marketing lunch following AD:TECH, Patrick Keane, Google’s head of sales strategy, introduced the self-funded SEM concept to the audience. Marketers understand self-funding marketing helps them prove to management bigger search budgets can pay for themselves.

Iggy Fanlo, chief revenue officer at Shopping.com, illustrated self-funded marketing’s power. In a Shopping.com technology category, the cost of marketing for the segment was in line with that of a credit card merchant account, about 3 percent. Iggy later shared specifics across categories. “We’re now tracking approximately 11 percent of our outgoing leads to sales. The most recent (last 14 days) average cost of advertising on Shopping.com is 4.2 percent as a percentage of sales.”

Every industry and product has a different profit margin. Yet 3 to 5 percent is likely to be a self-funding spend for any business.

Most marketers with a self-funding strategy in an overall marketing plan use an “allowable.” That’s the cost of an order below the net profit and, therefore, a guarantee of a profitable campaign. Allowables can be set as a cost per order (CPO), cost per action (CPA), or another return on investment (ROI) metric, such as profit per dollar spent, where return is calculated as net profit per order (instead of just revenue).

At the end of the day, it doesn’t matter which ROI metric is used, as long as the metric factors in the transaction’s net profit and compares it to the cost of driving that transaction. When, on an ongoing and predictable basis, the cost of achieving a sale is less than the net profit on that sale, the marketing program is self-funding. The closer net profit is to the cost of marketing, the less actual profit left for the company.

To get rolling and ensure a reasonable profit, marketers using the self-funding concepts don’t factor in lifetime value. This means if some buyers actually buy more than just one order and generate profits far in excess of the initial net profit, that information isn’t taken into account when setting allowables. In reality, some customers are heavy buyers. Over time, including lifetime value data can further improve the accuracy of a self-funded campaign.

Say a travel company sells vacation packages to Orlando. Each package earns $90 in net profit. If a campaign runs the following keywords, it’s self-funding:

Keyword or Listing CPC ($,
illustra-
tive)
Con-
version,
(%)
CPO ($) Net
Profit ($)
“Orlando vacation” (Google) 4.29 5.0 85.80 4.20
“Orlando vacation” (Overture) 3.30 4.5 73.33 16.67
“Orlando trip” (Google) 1.40 4.1 34.15 55.85
“Orlando trip” (Overture) 0.70 4.3 16.28 73.72
“Orlando package” (Google) 2.20 3.8 57.89 32.11
“Orlando package” (Overture) 0.40 5.2 7.69 82.31
“Orlando” (Google) 0.90 1.3 69.23 20.77
“Orlando” (Overture) 3.00 1.5 200.00 -110.00
XML feed for Orlando page 0.30 1.2 25.00 65.00
LookSmart listing page 0.50 1.5 33.33 56.67
Shopping.com listing 2.00 3.6 55.56 34.44

Net profit across most of these listings is positive, although some deliver a higher net profit than others. The listings with poor conversion rates compare to cost result in revenue, but at a negative net profit per booking. Negative net profit listings aren’t acceptable for self-funding campaign. The marketer would reduce the CPC and/or position in a paid-placement auction to bring the listing into compliance with a self-funding strategy.

Profit maximization is always a consideration, even in a self-funding campaign. That’s the process of weighing the trade-offs between net profit per order and total profit. Once you’ve established a self-funding program, you know every order pays for itself. That still doesn’t mean you’re making the highest total profit.

To maximize, establish a method to calculate if higher bids for keywords that are making a net profit would deliver sufficient additional order volume to offset, and more than compensate for, reduction in the net profit per sale. In paid placement, dramatic increases in traffic volume can occur with only small changes in price. This is most evident with Overture but is true for Google and other paid placement engines, too. Increased click volume generates higher order volume, possibly resulting in higher overall profit.

Paid inclusion listings can also be managed based on a self-funding campaign strategy. In the case of paid inclusion, the choices that can be made if a listing isn’t in compliance are more limited. Creative changes can be made in some venues, and keyword mix adjusted. But if those techniques fail, one is left with no alternative but to delete the listing or attempt landing page improvements.

If you have lifetime value information, factor it into the net profit to determine the profit of maximizing bid levels for each listing. An understanding of profit maximization and a self-funding campaign strategy ensures you’re making the most of your campaign.

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