Making the right decision on the amount of budget you’re going to allocate to online campaigns can be tough. Imposing a budget limit requires thorough analysis. Studies show that running a campaign without imposing a budget may result in unnecessary costs. Every market has a saturation level and beyond that, you can’t find new customers or leads. At this point, investing more money will only decrease your profit. [i] Besides that, bidding for a higher position may not be the best strategy. Well established studies have shown that the best position may be second or even a lower position. [ii]
Best position: second or even lower?
On the other hand, there is evidence that shows that companies with a limited budget, may be exposed to the risk of being kicked out by competitors who don’t clearly define their budget. Competitors have an incentive to increase their efforts to make the budget of their competitors’ deplete faster. This process may increase their cost per click for a small percentage of clicks, but considering the second-auction nature of the bidding that search engines use, they will finally get a higher position at a lower cost for a large portion of their clicks.
For small companies this decision may look more critical. They may end up spending thousands of dollars on campaigns that generate no profit and are therefore a waste of money. Compared to traditional advertising channels like print ads in magazines, faulty decisions in online channels may be worse, because performance data is available almost instantly and when you pay for a wrong click, your money is gone forever!
When you pay for a wrong click, your money is gone forever!
The other important aspect of budget planning that usually doesn’t get noticed is the spill-over effect. The ordinary path that people follow in informational searches is that they start with a general keyword and after getting a better understanding about the companies and products in that specific segment, they start using more specific search terms that include brand terms. Advertisers look at the final conversion data and so it’s obvious that brand keywords generate high quality clicks and more frequent conversions. So, can we stop spending on general keywords? Studies shows that spill-over effect varies according to the industry, day of the week, time and other factors. [iii]
To make a wise decision, I recommend defining your overall goals and value per click as a first step. When facing fierce competition on search engines, you may get emotional and increase bids to an amount that looks crazy. A recent study shows that people may even be willing to pay 0 or more per click! [iv]
Another interesting article for you:
People may even be willing to pay 0 or more per click!
For the Second Step, choose the types of campaigns you want to run. For branded keywords, it depends on the competition, brand awareness, and definitely your total marketing budget.
If you’re a small company and nobody uses your brand name as a keyword for their advertisement, and your websites shows first when someone looks for your company, probably there’s no need to invest on brand campaigns. In general, clicks from brand keywords have a higher chance of conversion and cost less for brands. However, if you decide to run a brand campaign, it’s probably best to run it with an unlimited budget.
For non-brand campaigns, it’s probably best to run the campaigns for a short while. After that you can analyze accumulated data to find out the best level of budget.
The third step is about adjustment. Don’t forget, it’s a repetitive process, you make changes, wait for a period of time, analyse data and make new changes. Optimization never ends!
[i] Yanwu Yang, Daniel Zeng, Yinghui Yang, Jie Zhang (2015) Optimal Budget Allocation Across Search Advertising Markets. INFORMS Journal on Computing 27(2):285-300.
[ii] Zare, Mehdi (2016), Best Position in Search Engine Advertisement – Top, First Page or Lower?, https://www.linkedin.com/pulse/best-position-search-engine-advertisement-top-first-page-mehdi-zare
[iii] Nottorf Florian, Funk Burkhardt (2013) A cross-industry analysis of the spill-over effect in paid
search advertising, Electron Markets