Greg Slama just forwarded me an email with the article below (originally published here). Author Bill Wise could not be more on the money:
Efficiency Levels, Not Spend Levels
by Bill Wise, Monday, Jul 31, 2006 12:00 PM ETSo back to the original question: How much should you be spending in search? The answer is that you should be spending however much it takes to make you efficient. Once you've hit the right level of efficiency, the search dollars you invest will justify themselves.
AT THE MEDIAPOST SEARCH INSIDER Summit last week, my colleagues Kevin Lee and Brian Silver had the opportunity to sit on in the Insider's panel. At the end of the talk, the floor was opened up for the crowd to request future articles they'd like to see. I hope to get to all of the topics that came up; for today, I'd like to tackle just one: the issue of how to know how much to spend in search. It's an entirely reasonable issue for marketers to look to understand. Since search is relatively new, it's a new item for marketing budgets, as well--so there's little precedent against which marketing managers can set the bar. Meanwhile, search metrics are phenomenally precise, placing a level of accountability into marketing that's never been present in the traditional sphere. With that greater accountability comes more responsibility, at every stage of the campaign--including at the initial stages of spend allocation.
But as reasonable as it is to want to know how much you ought to be spending in search, the question happens to be largely irrelevant. After all, your goal in any business venture--search included--isn't to hit a particular level of spend; your goal is to get the right level of return. If spending a million search dollars a day would bring in three million dollars an hour, you'd spend it, no questions asked; and if spending 10 cents a day brought in only 5 cents, then even 3 cents would be overpaying. It's the profits you make, not the amount you've spent, that make a difference.
In other words, the focus on spend needs to be replaced with a focus on efficiency. Efficiency means getting the most powerful outreach you can, at whatever level of spend you're working at; it also means being able to drive a greater portion of the traffic you collect into conversions. Efficiency means, for example, creating optimized ad copy that attracts the searchers you want to attract, and that sends away the ones who probably won't convert. It also means delivering landing pages that are sticky and usable enough to drive visitors towards your shopping cart, registration page, or display ads that you're siring on your content site. It also might mean applying behavioral retargeting, to deliver ads to the searchers who have come to your site and left--so you can pull them back in and drive them to a conversion.
The more efficient your campaign, the less relevant the question of spend level becomes. That's because greater efficiency means greater net profit--which both improves your bottom line (the ultimate goal of your campaign), and gives you more money to reinvest on more advertising. Which means that $1 of efficient spend might be worth $3 of inefficient spend, and vice versa. The question of efficiency, in other words, changes the focal spend question from: How much should I spend? to How much is my spend worth?
Building your efficiency requires understanding your customers. The better grasp you have of issues like where your core market lives, what times of day they search, what kinds of messages they like to see, and what kinds of sites they go to, the better you'll be able to reach out to them and build the architecture that drives conversions.
Developing that understanding requires that your search management has the best client services possible, and the best analytics possible--both are necessary for building an accurate picture of your core market's identity and behavior.
My only problem with Bill's sentiment is that he really should take the next step and apply his efficiency rationale to all marketing tactics. There is a total marketing budget which is ideal for any product or company, beyond which dollars are wasted. Despite year 2000 ad campaigns which would claim otherwise, you do not spend $100 million in advertising on a company which will never break annual revenues of $2 mil.
Within your optimal marketing budget, you also need to max out the spend on your best tactic until it is at the lowest acceptable level of efficiency, then continue to spend money on the next-most-effective tactic, while focusing not on each tactic's effiency unto itself, but on the aggregated efficiency of all your live campaigns.
If you have three tactics in market -- let's say search, direct mail, and DRTV -- and together they are producing an ROI which is only three percentage points above your lowest acceptable level, then you essentially have no wiggle room, and any new tactic you add needs to outperform any of your in-market tactics.
If, however, your paid search campaign is kicking ass, with an ROI 20 percentage points higher than the lowest acceptable level, well, then you have two options. You could pour more money into search -- and this is naturally the obvious, easy way to go -- until your Search ROI comes back down to its lowest margin. However, you also then have room to run with a riskier tactic, which may run too inefficiently on its own to suffer, but combined with the results you're seeing with Search, it may perhaps then put you at an overall return on your investment you can be happy with.
Which leads to another interesting point -- the relationship between all your tactics. As most new marketers quickly realise, no campaign operates in a vaccuum. Word of mouth, television campaigns, email, online display advertising, billboards, paid search, every one of these exists to not just drive revenue on their own, but to lift the results of the others.
Yes, you may find that your Paid Search efficiency was maximized at a $100k spend in Q1. However, if you throw that expensive and hard-to-measure DRTV campaign into the mix, you may suddenly find that your search volume skyrockets, to the point where your $100k Search spend is driving unheard-of efficiency due to the volume you're getting and where Google (and soon Yahoo!) is kicking you on your CPC. Suddenly you can spend $300k on Search while maintaining an even higher efficiency, all because you dropped money into a relatively inefficient tactic which nonetheless lifted all boats.
It's all relative, but now the game becomes figuring out the mix model so the result of every possible option's interplay with the others becomes defined and quantified. Should be interesting.
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