3 Reasons Why Being Profitable On Paid Advertising Might Not Be Enough

About a year ago, I’ve read a book on marketing and business in general. It clearly stated that once you have found a way to turn paid advertising into a way to earn even the tiniest percentage all you have to do is to increase the budget.

So, the book stated that if you find a way to use paid advertising to turn a profit, you can just increase the budget and earn money on every sale. Easy right? Wrong!

I completely and utterly disagree on that and for good reasons. Setting a daily budget on PPC advertising is an art in itself and here’s why.

There is still work to be done

Let’s say you have an online store like we do, and you can get your Google Ads down to $5 per conversion. Of course, you have your Google Ads Account set up to show you how much your margin from the order was, which might have been $15.

That seems like a profit of $10.

But the thing is there is still work to be done for every order. Even if you have an e-book that gets automatically delivered you need to consider overhead costs.

Obviously, if you have a people on staff that are bored out of their mind, because you don’t have enough work you should not consider their time. But in general, you need to take into account all the work and overhead costs that are produced by that order.

So, you need to be able to calculate how much of a profit you would need per order to be happy with that marketing expense, otherwise you might consider cutting it.

CLTV might be extremely low

I hear the experts scream at me while writing this: “But what about customer lifetime value?”. Yes, you need to take into consideration the fact that this newly generated order has given you a customer, who over the course of her life will place multiple orders.

Obviously, you should not overlook that important factor.

Unfortunately, there are a lot of businesses that have a very low CLTV due to different circumstances. For example, if you sell commodities, the customer might not care much where he gets the product as long as it’s cheap.

So, every time the customer wants this product, he goes to look who sells it for the lowest price and maybe offers a discount or voucher code.

In order to get an order from that particular customer again, you have to spend on your advertising and therefore will not have spent the initial amount to gain a customer for life, but just for one single order.

Another reason for a low CLTV or virtually no CLTV, might be that you cannot sell your item to the same person again and have no upsell whatsoever. I mean look at real estate. Most people by only one property in their life, so you won’t generate more income than the one house or apartment you might have sold to them.

Increasing budget might change the dynamics

So, let’s say you have found a way to generate sales through paid advertising and the cost per conversion is $5. You have set your daily budget to $50, which in turn equals 10 conversion per day for your business.

Sounds nice right? Why not turn the budget up to $100?

It is very enticing to just crank up that budget. I mean what’s stopping you from generating 1000 orders with $5000 a day. Virtually nothing.

Technically you are right, and you should turn the budget up and see where it gets you. But do so carefully, because there will come a breaking point and unless you sell an extremely unique item, it will come fast.

You will most likely find that when using a $500 daily budget, instead of getting 100 conversions or leads, you might be getting only 50 or less and because I have already explained that you need to consider the work that goes into every order, you might now be out of that profit zone.

Find your sweet spot

So, what should you do? You go ahead and calculate your margin and the necessary profit per conversion or lead for you to actually turn a profit.

Afterwards you run ads and start with a mid- to low-level budget and see what ads work best. Once you turn a profit you turn the budget slowly up until it stops being profitable. Then you turn it down a little to find your sweet spot.

You do that while considering your customer lifetime value and of course, your staff expenses that are there no matter how many orders get processed.

Right time, right place

Additionally, Facebook and other online platforms are somewhat seasonable. You will most likely generate less conversion during the summer period than during the winter.

So, you might want to take that into account as well, when deciding on what your daily budget should be.

Everything I have stated in the post has worked for us very well, but you need to consider how your business is set up.

For example, when we were just starting out, we did not turn a profit on any conversion we generated through paid advertising. Simply because, we need to gain experience and, even though we had no data yet, we did factor in a bit of a customer lifetime value.

So, keep in mind that setting a budget for paid advertising is not black and white, there is a huge grey area to consider.

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6 months ago

[…] The downside: It’s harder to use the budget as you can see that you make a profit with every conversion so, just let it run. (Which might not always make sense, as I have stated in my blog post 3 Reasons Why Being Profitable On Paid Advertising Might Not Be Enough). […]

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