This is a marketing question I get asked A LOT. I always respond with a question of my own.
Are you treating marketing as an expense or an investment?
Business owners generally fall into one of those two camps when it comes to marketing. If they say expense, then I’m confident they don’t know where their sales are coming from and are struggling to scale their business. Those that treat marketing as an investment understand which marketing channels are providing profitable returns, and increase or reduce investment accordingly.
I just want to be clear. This isn’t a reflection on the business acumen of the person asking the question. Its normally just a lack of experience in digital marketing and understanding of the subject.
With that in mind, I want to cover a topic that is often misunderstood when attempting to budget for online advertising. Unlike traditional media buying, online advertising prices are rarely set by the publisher. In fact, the vast majority of online ads today are purchased in a real-time advertising auction.
Google, Facebook, Twitter, Linkedin & Amazon all operate using the same basic model. Advertisers bid against one another for the price they’re willing to pay for a click on their ad (visits to their website). Which begs the question. How do you know the price you should be paying per visitor, and can you afford it?
You need to understand two critical dimensions of your online business before you can confidently answer those questions..
- What is your website conversion rate? (how many visitors (clicks) it takes to generate a purchase / enquiry from a given ad campaign)
- What is the lifetime value of your average customer? (the true value of a customer, not just the first purchase)
Clearly if you don’t know how many website visitors to make a sale or the true value of that sale, its really NOT advisable to attend an auction to bid on advertising.
Fortunately for Google and Facebook, the advertising market is still very lightly regulated when it comes to ad sales. Unfortunately for you, this means auctions are filled with participants that not only don’t know the answer to the above questions, they often rely on software to automate their bidding. Unlike a regular auction, the number of participants is so large (Facebook has over 10M advertisers bidding on ads right now) that having a strategy to just wait until the idiots run out of money rarely proves effective.
I should also clarify this is a real-time auction that runs 24/7. So what you bid for a click today will not be the same tomorrow or in fact potentially a minute from now. This obviously makes budgeting for advertising more complex as the goal posts are perpetually shifting in line with the market sentiment.
If you’re starting to see some parallels with the financial markets then you’re not alone. Google made $147B from advertising auctions in 2020. Worldwide the market is estimated to be worth $378B. That’s a lot of clicks being
The good news is armed with the right knowledge you can develop a profitable bidding strategy and participate in online advertising successfully.