Maximize Profit for Given Budget

This post explains the difference between a fixed and a shared budget while using flexible bidding strategies.

Assume you are in a competitive market with high overall demand and you start a campaign with a fixed daily budget.

FixVsFlexBudget

 

Fixed Budget, Flexible Bidding Strategy (1->2)

The lower curve in the figure shows how profit scales as a function of cost per click (CPC) for a foxed budget. The law of diminishing returns means that as the cost of PPC advertising goes up, profit margins go down. Maximum profit is at point 2, then it  declines with increasing bid. Google introduced various flexible bidding strategies, see next screenshot. A bidding strategy optimizes bid levels for a specific goal. It can be set at the campaign, ad group, or keyword level.  These new bidding strategies are an alternative to the well known focus-on-maximum-clicks, focus-on- maximum-conversions or the manual bid management strategies.

Flexible Bidding Strategies

Flexible Bidding Strategies

For instance with ‘Target return on ad spend‘ you could work your way to the point of maximum profit, possibly moving from point 1 to 2. This strategy requires conversion tracking being set up and specification of the value of a conversion.

 

Shared Budget, Flexible Bidding Strategy (1->3)

However, if your fixed budget keeps you from reaching overall higher profits, that means you are not spending as much as you could on particular campaigns.  Google AdWords introduced the concept of the ‘Shared (Flex) Budget’ in May 2013, see figure below. That combined with one of the flexible bidding strategies  can maximize total profit; let Google figure out how the budget is distributed in real time to reach the maximum number of impressions. This allows you to go from point 1 to 3 and maximize profits even more for a given daily budgets.

Google Shared Budget

Google Shared Budget

Maximum Profit (4)

That state is reached at point 4. You can find out if you are close to maximum impression share by looking at the performance metrics called ‘Impression Share’ of each campaign and also at the aggregate level. Say if you are at 50% impression share due to your budget and scheduling parameters, you know that increasing your overall budget could get you more impressions. That is, in an ideal world you are moving from point 3 to 4, the point of maximum profit that your organization can handle.

To summarize, Google AdWords can be configured to achieve maximum profit for your organization. A flexible bidding strategy and a shared budget can be combined to achieve this automatically. As long as your impression share is less than 100% of your target market, you can increase the total daily shared budget until you approach the total global profit maximum.

Disclaimer: the PPC bidding landscape is dynamic and changing. Other factors like landing page quality, keyword score, keyword breadth, match type etc., which also impact PPC effectiveness, have not been considered here.

Contact us to find out how you can maximize your potential with Google AdWords online marketing.

 

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