CSE Economics: Ad Spend vs. Revenue

 

Find Your Niche

To bid or not to bid? Life is full of trade-offs and the Comparison Shopping Engines are no different. Do you break the bank and drive as much traffic to your site as possible? Or do you slow-play and wait for your site to build relevancy and send you more qualified leads?

The most profitable answer is the balance between ad spend and revenue generated; or the profit niche known as CSE Equilibrium.

In this niche, you grow your campaigns towards the lowest possible ad spend that generates the highest amount of revenue. For instance, if your margins required you to get a 3 to 1 ROI we would increase bids and spend enough until each extra unit increase of spend equaled at least a 3 unit increase in revenue, thus maintaining profitability. You are selling as much as you can while still meeting the margins required to turn a profit.

This process can often be misinterpreted because retailers often think more traffic means more revenue but in reality we only want to pay for traffic that will pay us back with a sale!

Using Comparison Shopping Engines, already successful online retailers can send extra traffic to their website, generate extra revenue and market to a whole new pool of online shoppers for a relatively small initial investment.

Diminishing Marginal Returns to Leads

As a retailer, I would always prefer to sell 6 units over 5 but if that 6th unit costs me too much more to sell I’d rather not.  In economics, you would want to produce until your marginal cost = your marginal revenue, but in Comparison Shopping Economics we want to increase spend or bids until the marginal cost = 3 times our marginal revenue or whatever ROI goals our markup requires. This is your Happy Place – CSE equilibrium.

To reach our happy place, we want to set our bids so that we generate sales revenue at the cheapest possible rate to curb the diminishing marginal returns to clicks.

For example, Albert is shooting for a 5 to 1 ROI – we want to invest $20 towards generating $100 in revenue rather than invest $40 towards $150 in revenue. Understanding his niche, the efficient retailer would set his average bid per click to around 14 cents(equilibrium below) which would in turn generate $5000 in revenue.

Unfortunately, with all the moving parts and products involved in managing a CSE campaign, retailers unknowingly manage their campaigns towards the .25 cent average bid to generate $6000 in revenue rather than managing towards long term success and their most efficient niche – where you bid only .14 cents.

When dealing with thousands of clicks across half a dozen campaigns, maximizing your ad spend could be the difference between a good and bad investment.

 

You’ll notice a curved spend line. This is because the more you spend the less qualified your leads become and the lower your conversion rates are. In other words, it’s cheaper to generate the first $5,000 in revenue than the last $1000 of potential revenue. We work to generate this “cheaper” revenue  for the most efficient return on investment, across all the pay per click shopping engines.

For instance, suppose Albert and I are in the business of selling engine parts, when we first launch the campaign we aren’t really relevant, we’re brand new, we have no reviews etc. The sales we generate, if any, come from long tail or largely specific searches like “Ford Fusion Intake Manifold Adjuster …” but once we increase our bids the CSE’s reward us with more traffic and clicks, now instead of our listings appearing at the bottom or only in specific searches we may appear in more general queries like “Ford Fusion.”

Now that may seem good and dandy but do we really want to be THAT relevant?

Chances are the shopper isn’t specifically looking for our part but we’ll still be charged for the click. This lead is less qualified and represents the diminishing marginal returns to ad spend. With free engines like Google we want as much traffic as possible but with the CSE’s we want to bid efficiently so that we get the most bang for our buck.

 

Finding the correct profit niche pumps up your numbers and grows out your campaign in the most profitable way possible. At CPC strategy we use our industry expertise, one of kind feed management systems, and dedicated account managers to expose your products the right way and pick all the low hanging fruit across the Comparison Shopping Engines. We look to minimize your expenditure while driving “efficient” revenue from each pool of potential buyers.

 

About the AuthorKaten is an Account Manager at CPC Strategy and works with e-Commerce merchants to get the most out of their PPC Campaigns. Using cutting edge techniques and strategic insight, Katen works to optimize the return for a variety of online retailers. Before joining the team Katen graduated from the University of California San Diego, with a double major in Economics and Psychology. See all posts by this author here.