The More You Spend on Paid Ads, the Worse it Gets

Declining ROI is the mark of a successful ad campaign

Sometimes our digital marketing efforts fail. Despite our best efforts, we just can’t get a positive ROI. All too often when that happens I hear that same pernicious claim: it failed because the client wasn’t willing to spend enough money.

That is the kind of marketing myth that can only persist because most marketers actually believe it. You may even believe it yourself. If so, my goal is to convince you to never again tell a client they have to spend more money in order to see results.

But before exposing the lie, let me acknowledge the limited ways in which it can be true.

TRUE: Digital marketing campaigns take some time to settle in. Both human and machine optimizations require data, so as you accumulate data the campaign performance should improve.

TRUE: There is often a lag between user actions like clicking an ad and completing a purchase. The customer journey is not instantaneous.

TRUE: The purpose of some campaigns is to build brand awareness and market recognition, and for that visibility and repetition are key. (But most digital marketing is not about mindshare, it’s about driving quantifiable user actions, and that’s the kind of marketing I’m talking about here.)

Those points are true, but I don’t hear people make them when they repeat the claim that the client needs to spend more.

They don’t say “give me more time to go through the search terms report,” or “Google needs more time to optimize bids and ad rotation” or even “our CPCs will come down when Google starts giving us higher quality scores on the basis of our performance.”

They don’t say, “I need more data in order to do my job.”

Rather the justification I hear is usually something like: “The clicks are too expensive for your budget.”

Which would make sense if the client couldn’t afford any clicks. If the CPC for the vertical is upwards of $100 and the client insists on a $10 per day budget, then surely the client is not spending enough money. I don’t dispute that.

But if the client is spending money then they are at least getting some clicks. This is pay per click after all. So the question is whether they have gotten enough clicks to call the campaign a success or a failure.

How to spot a loser

In my experience, by the time the client starts expressing concern there have usually been enough clicks to make that determination.

There is no exact number, but I think a good rule of thumb is if the client has spent three times the Customer Lifetime Value (LTV) without a single qualified lead, that means further optimizations are unlikely to improve things enough to make the campaign profitable. If you want an explanation why, check out my post on knowing when to call it quits.

What about success?

I told you my rule of thumb for identifying a failed campaign, but how do we know when it’s a success? Ultimately every business owner cares about making a profit. They don’t care about CPC, CTR, CRV, CPL, or any other acronym that doesn’t redound to their bottom line.

Your client’s goal is to get customers at a Customer Acquisition Cost that is lower than their Customer Lifetime Value. As long as CAC < LTV, the client is making a profit.

Therefore we can call our efforts a success the moment we start supplying leads they can close for a total CAC that is below their LTV. With an idea of their own close rate and customer LTV, the client should be able to provide us with a lead value, and we measure our marketing efforts against that benchmark.

It gets worse

In the beginning, our optimizations should yield a steady decrease in the CAC as we optimize bids and improve the conversion rate. But if we are successful, that trend should reverse and costs should climb.

In other words, our metrics should get worse, not better.

The reason for this is simple. A good digital marketer will always go for the lowest hanging fruit first. The most accessible traffic, the most qualified visitors.

But why stop there and leave money on the table? Every customer that can be acquired for less than their lifetime value is a win. To maximize the client’s profit, we want to keep climbing the tree for higher and higher fruit until at the margin CAC = LTV.

To put this in PPC terms, we want to bid for the ad position that maximizes the client’s profits, not the position that yields the lowest CPL. And we want to go after every search term that yields profitable traffic, not just the most profitable search terms.

When you optimize a campaign for profitability, you should eventually push right up against the edge of acceptable performance metrics, getting even those least qualified, most expensive visitors that can still be converted at a profit. That means your client should expect to spend more money and get less for that last marginal dollar.

Get in the black and stay there

Smart business owners are careful about their money but willing to take calculated risks. They know there are no guarantees in marketing and that every marketing campaign is somewhat of an experiment.

We should treat our marketing efforts accordingly and have clear evaluation criteria at the outset. In my opinion an adequate sample size usually requires spending three times the LTV provided by the client, at which point we evaluate how close we are to yielding a positive return on the client’s investment.

If after 3 x LTV we are in the black, we call the campaign a success and optimize for maximum profit. If we are not seeing any signs of life at that point, we have to have an honest conversation with the client about what improvements are realistically possible and whether to proceed. What we don’t want to tell them is that if they just spend more money, things will get better. Instead we want to be able to tell them the opposite: when our marketing is successful, things should get worse.

By Kevin Frei at April 19, 2019