Always Look at Marginal CPA in Advertising Spend

Online Marketing PPC Forums Always Look at Marginal CPA in Advertising Spend

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    JT
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    Many marketers, in my experience, optimize their AdWords campaigns by average cost per conversion or cost per acquisition, not by marginal. They decrease profits as a result.

    Sometimes it’s intentional, more often it is unintentional. Marketers see that coveted Target CPA or Average CPA metric and get stuck there.

    Optimizing to the marginal cpa, rather than the average allows you to increase your maximum profit.

    What is Marginal CPA?

    Marginal CPA is the increase in cost before and after a change, divided by the increase in conversions. They are the additional costs it takes to get additional volume.

    For instance, let’s pretend I currently get 100 leads at $10 per lead. I could get 120 leads for $15 per lead. My total costs went from $1,000 to $1,800 to get an additional 20 leads in volume. Even though my average CPA was $15, the marginal CPA was $40, or 4x more than my original CPA.

    If your profitable CPA is $20, you just went from $1,000 in profits, to $600 in profit. Before each of the 100 leads brought $10 in profits, but now each of the 120 leads only brings in $5 in profit.

    The optimal point for maximum profits at which you should stop increasing bids is the moment marginal CPA is higher than your profitable CPA.

    Let’s use an example with dollar bills. Let’s say you can spend 100 $5 bills and some crazy person will give you 100 $10 bills. Your total profit is $500 from this exchange. But let’s say they say “Let’s liven up this deal and you give me 150 sets of $6, and I’ll give you 150 $10 bills”. Some people would take this and run, because the total volume has increased. Yet smarter people will do the math. Now we’re looking at $4 profit 150 times for $600. You’d take the deal. But now let’s say the deal changes again, and you can sell 200 sets of $8 for $10 each. Now your total profit is $400 and you do not take the deal.

    It makes it seem super obvious when you use dollar bills like that, but not as obvious when dealing with advertising. Yet the concept is the same. You have a “value” you get from your acquisitions, or the $10 bills. You also have a cost per acquisition, or the $5 bills.

    Typically PPC platforms do everything they can to ensure you focus on the average, not the marginal. Agencies and third party vendors thrive in this area as well, because if they can spend more money and not be fired, they’ll do it!

    However, Google AdWords does have a bid simulator next to your CPC or CPA bid that projects total costs and change in conversions or clicks. This isn’t always accurate, but a good rule of thumb is that if it says you’ll get 1 additional conversion for 2x your acceptable cost per conversion, you can trust it is a bad choice. If the simulator says you can decrease costs by 50% and only cut your conversions by 10%, it may be a a great choice.

    Keep in mind, AdWords Algorithmic Smart Bidding is programmed to get you the most volume while maintaining your average CPA, and they have no incentive to spend any amount under than target CPA. You could get a million conversions at $20 a piece, but if your bid is set for $30 CPA Google could spend an additional $10,000,010 to get one additional conversion and it’ll look like they’re succeeding. As long as you meet your target CPA, margin doesn’t matter for Google’s algorithms.

    In paid search, that means bidding too high of a position or throwing in ineffective sitelinks to take up more space at a higher cost or use worse ads. In the display network, that means serving too many impressions on higher cost, lower relevance sites to hope for that additional click that’s still within budget.

    Does that mean you can’t use Google’s smart bidding for target CPA? Well, I wouldn’t say that. Their smart bidding is very good at optimizing to audience, ad copy, ad size, device, time of day, and using a number of hidden factors as well. However, don’t set your TCPA at your profitable CPA. Instead, set your TCPA at a lower point, perhaps using the bid simulator tool, calculating the change in cost divided by the change in conversions.

    That’s definitely not as good as if Google issued a true marginal CPA bidding tool, but for now you’ll have to do some manual calculations.

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