Consider this Scenario:
You spend $1,000 on a new Ad Campaign that generates $10,000 in revenue. “That’s a great ROI” you tell yourself, “Let’s double the spend!“.
When you double the budget to $2,000, your Campaign only generates $12,500 in total sales and not the $20,000 you were expecting. Why?
| Spend | Sales | Cost of Sales | ROAS | |
|---|---|---|---|---|
| Ad Campaign #1 | $1,000 | $10,000 | 10% | 1000% |
| Ad Campaign #2 | $2,000 | $12,500 | 16% | 625% |
Why doesn’t it scale?
By scale I mean that your ROI should be linear: If the first $1,000 generates $10,000 in sales, then the next $1,000 should also generate $10,000 in sales.
The issue is that rarely is your campaign performance evenly distributed. If your drill down deeper into your initial $1000 Campaign, you might see the spend broken down into something like this:
| Spend | Sales | %COS | ROAS | |
|---|---|---|---|---|
| Branded | $200 | $8,000 | 2.5% | 4000% |
| Unbranded | $800 | $2,000 | 40% | 250% |
| $1000 Campaign | $1,000 | $10,000 | 10% | 1000% |
The performance of the Branded subset is subsidizing the cost of the Unbranded subset. 80% of your sales are coming from only 20% of the spend, while 80% of your spend is going towards an underperforming segment.
When we try to double the budget to $2,000, here is how the budget gets allocated:
| Spend | Sales | COS | ROAS | |
|---|---|---|---|---|
| Branded | $200 | $8,000 | 2.5% | 4000% |
| Unbranded | $1,800 | $4,500 | 40% | 250% |
| $2,000 Campaign | $2,000 | $12,500 | 16% | 625% |
With this new data in mind, we should probably:
- Decrease budget on the Unbranded segment
- Increase budget on the Branded segment
However, it is probably the case that your performing segment is already receiving 100% reach/impressions. So spending more is usually not possible. (In particular for Google Search Ads targeting your branded term: How much you can spend is a function of how many people are searching for your brand. Once you reach everyone, spending more can’t get you more people).
If you want to increase your spend, the only place to do so is in the underperforming unbranded campaign. But at least you’ll have a better expectation of the results.
Summary
- Avoid making budget decisions on aggregate data. Always try to segment and dig a little deeper.
- Don’t let underperforming segments ride the coat tails of your top performers. Look for 80/20 campaign and ad group performance and analyze those individually.
- For Google Search Ads, always separate your Branded search terms and Unbranded search terms into separate campaigns.
Alex Czartoryski 