When it Comes to Budget—How Much is Too Much?
 By Thad Kahlow, CEO, BusinessOnLine

In pay per click advertising (PPC), people are constantly saying, “The more you can spend the better.” What most people don’t talk about is the point at which additional investments stop generating an equivalent incremental gain. It is the law of diminishing returns, and if you aren’t paying attention you might be paying too much for your PPC campaigns.

At what point does increased budget fail to produce an exponential—or even linear—increase in conversions? It can be difficult to determine, but achievable through testing. That’s right, in PPC, testing is key. Just as you test ad copy, landing pages, and ad position, testing the effectiveness of budget increases, and learning how to identify the point of diminishing returns is critical to ensuring positive ROI.

What makes this type of testing so complicated is that the search environment is extremely dynamic and there are numerous variables involved. In order to measure, you must first ensure a sound testing environment and a plan.

Here are some key steps to follow when outlining a testing schedule:

Make sure your account is optimized. It doesn’t make sense to test the point of diminishing returns on a brand new account, because you will not have a valid benchmark to compare results. Without benchmark data, you will have nothing to gauge the results of the test and, therefore, won’t know if your test has been successful.

Tip #1: Make sure the account has been running smoothly for at least a few months before you begin.
Don’t make account changes during the test. Keep as many of the variables fixed as possible so you can reasonably assume the test outcome is due to budget changes. If you are trying to test budget increases while drastically increasing the number of keywords in your account, the results will be skewed, and you will not have an accurate representation of the data.

Tip #2: Plan to assess budget increases during a time when you are able to perform minimal changes to your account.
Clearly outline a plan and stick to it. Once you’ve set up a testing schedule DO NOT change it. It may seem logical to decrease the budget if you aren’t seeing the results you anticipated, but reducing budget mid-test will skew all your results, and you will have to begin again. It is important to go through the entire testing period and then analyze the data, so you get a clear understanding of how the budget is affecting your account. So, run your testing schedule consistently and analyze the data once the entire testing period is complete.

Tip #3: Remember, it is normal for your PPC account to experience peaks and valleys throughout different times of the day, days of the week, weeks of the month, etc.
Ensure the testing cycle relates to your business model. Use historical data to determine the test length. If your average month consists of heavy sales in the first week and tapers off toward the end, then do not use one week as your test length. If your business relies heavily on the holiday season, then do not begin your test in the fall.

Tip #4: Make sure your testing period is long enough that it is statistically significant, but not too long that it encompasses many seasonal changes.
Confirm results. Once the test is complete and you have found your optimum spend, continue to monitor the data diligently. With so many unknown variables, testing will never be 100 percent accurate. Many factors affect your PPC account and advertising ROI. If, in three months you notice your ROI is slipping and conversions aren’t what they used to be, do some investigating.

Ask yourself these questions: Have more competitors jumped in the space and driven up bid costs? Is your product/service pricing no longer as competitive? Are your ads no longer bringing in the most relevant traffic? Are your landing pages outdated?

Tip #5: When things shift dramatically, consider re-optimizing your account and start the test again based on a new benchmark and new testing schedule.
Budget testing is not easy, but should be an integral component of any PPC campaign. It should be as much a part of your overall strategy as any other critical measure, because discovering the point of diminishing returns is the number one way to ensure you don’t overspend.

Testing methods and duration will vary depending on your business, but the underlying concept is the same—devise a clear plan and stick to it!

---Source: Thad Kahlow is CEO at BusinessOnLine, a pioneer in the interactive marketing space with a 14-year track record of successfully leveraging the interconnectedness of the Internet to help companies grow their digital presence. Reach Thad at thad.kahlow@businessol.com or follow him on LinkedIn and Twitter @tkahlow.