Think You’ll Lose Money by Bidding for the Top Spot? You May Be Surprised

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Marin Software’s Marketing Insights blog recently featured this article by Dane Manning, Paid Media Manager at Rosetta. The original piece can be found here.

You put a lot of time and effort into your Paid Search advertising. You leverage Marin’s bidding algorithm to efficiently and effectively automate your bidding process based on individual ROI/CPA goals.

Your competition probably follows a similar process. So how is it that your competitor keeps showing in the first spot, even when you try to loosen the reins on your ROI/CPA targets? You enviously theorize about their amazing site conversion rates or a giant SEM budget that permits them to outbid anyone just for the sake of being number one.

In all likelihood, their reasoning is probably more scientific than you think; it’s just a different science than you are used to.

Let’s consider two competing advertisers with identical site conversion rates and AOV, both selling and bidding on the term “Acme Widgets.” Advertiser 1 is on an ROI-based model and will value that click based on what they expect to make from any orders that occurred that day. Advertiser 2 knows that on average, when a customer makes a purchase of Acme Widgets, the value extends much further. They get looped into the CRM system, email, SMS, and direct mail cycles, and tend to stay with them for about 3 years, placing several orders per year throughout that time.

Who do you think will be willing to pay more for that bid, and will constantly win the auction for that top position?
The majority of digital advertisers’ budgets fall into two categories:

  • Fixed – Get the most revenue/leads you can out of $X
  • ROI/CPA-based – Acquire as many customers as you can, but only up to a fixed ROI or CPA

When asked what the main goal of their digital marketing program is, however, a common response from the executive team is “grow the business” and/or “acquire new customers.” Deep down inside, they know that there is value that extends beyond that initial purchase, but can’t wrap their heads around the short-term cost vs. the long-term gain.

This creates a challenge for marketers who try to manage to a fixed ROI. When they optimize for growth and new customers, the CPA rises. When they optimize for ROI, the growth stops. This results in targets that are constantly moving back and forth.
To truly compete and acquire new customers in the digital landscape requires a mind-set that values the entire customer life cycle and stresses growth and profit over all else.

A Challenging Paradigm Shift

It seems obvious, but most advertisers are not thinking like this. The truth is that it is difficult to change models that have been in place for a long time and require sign-off from several stakeholders.

Understanding the lifetime value of a customer will significantly shift how you view digital media investment and should become an element of your measurement and optimization. You can streamline this process by leveraging Marin’s Custom Column feature to bring LTV calculations into your dashboards or bidding logic. If you aren’t sure how to get started, an excellent 4-part series recently wrapped up with a wealth of information on building LTV models.

Next, once you find a CPA that works better to maximize your customer growth and profits, don’t hold all digital marketing channels to that same CPA. Tactics work very differently, but work well together to help your reach your overall growth goals.

Finally, give it time – you already know that it takes a long time for a customer’s value to build within its life cycle, so give your new model time to grow, too. You can still monitor daily or weekly like you’re used to, but don’t panic when efficiency suffers initially, because it will. Test often, but adopt a monthly or even quarterly mind-set when it comes to significant trimming and optimizations. Without growth there would be nothing to trim at all.

 


View the Rosetta Consulting white papers “Customer Engagement from the Marketer’s Perspective” and “Customer Engagement from the Consumer’s Perspective.”

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