Setting budgets can be difficult, especially in new campaigns. Setting a budget that’s too high or too low can lead to wasted spending, machine learning issues, and other account performance issues.
That’s why we’re going to spend this Ask PPC column addressing the relationship between budgets, conversions, and CPA.
asks Jack of Colchester,
“I often see a daily budget that is less than the total cost per conversion. Will having a daily budget that is higher than the cost per conversion improve conversions more by having enough budget per day?
For example, if the conversion cost for a coffee maker is £120, does the daily budget matter?
Let’s say we have a daily budget of £200 for 5 working days and a CPA of £120, for a daily budget of £333 for 3 days. Technically, on day 5 I would have 1 a day vs. on day 3 I would have 2 a day. I may be over thinking this – I hope you can help.”
Basic rules of engagement
It’s important to remember that daily, monthly, and lifetime budgets behave differently.
If you set a daily budget, the ad network will attempt to calculate your average daily spend over 30.4 days. This could mean that the ad network will spend up to 200% of your daily budget on a given day.
Monthly and monthly budgets allow for more fluctuations in daily spending, and for the most part you’ll honor said number.
They’re great for those who need to spend a certain amount in a certain period and can be an easy way to get around the ramp-up period for new campaigns.
CPA is determined by conversions, which you define as “internal conversions”.
This number could rise by including too many conversion procedures, or not enough.
Secondary conversion actions will not be factored into reported CPA or Smart Bidding.
Budget impact on conversions/CPA
Your actual costs are determined by impressions and clicks. CPA and conversion rate tell you:
- Does the sales team/location close the deal?
- Are you configured for quality or volume of traffic?
- Can your budget support all goals?
In the example question, there are some unstated mechanisms:
- The advertiser generated 8.34 conversions for £1,000.
- Single transfers may have cheaper costs; However, total reported CPA factors into total cost divided by total conversions.
- We don’t know how many clicks it takes to get 8 conversions.
Budgets should be able to support at least 10 clicks per day as a 10% conversion rate is good for search. The easiest way to find out if you have an adequate budget is to look at the impression share missing in the budget.
If the budget is too low to support enough clicks to the site to trigger the conversion rate, the CPA will go up.
Increasing your budget doesn’t always lead to a lower CPA. If the traffic quality is poor, it doesn’t matter how much fuel the campaign saves.
Starting with a slightly higher budget for the first 60 days of the campaign can help you gain statistical significance for the quality of your traffic.
This way, any adjustments to the budget are based on a measurement of conversion volume rather than a troubleshooting intent.
When should you change budget vs. When to change the channel
It is important to know when a channel is right or wrong in a budget.
Lowering the budget to paid search results can lead to higher CPA due to higher CPC.
Bringing in a large budget for an awareness campaign (social targeting landing page visits, video, etc.)
Indicates that the problem is not enough budget:
- The percentage of ads appearing at the top of the page consistently is less than 40%.
- The average CPC exceeds 10% of the daily budget.
- Campaign struggles to spend budget consistently (ie occasional spikes throughout the 30.4-day period).
Evidence of the problem is the channel:
- Poor or random lead quality.
- The budget increase did not help put the CPA in place.
Your budget doesn’t guarantee a specific number of conversions or CPA. It feeds your ad campaigns to give you impressions and clicks.
Budgets on a campaign should not be changed unless the campaign does not support the goals that have been set for it.
I highly recommend using ad network budget reports, which will help you predict what your budget is capable of achieving.
Do you have a question about PPC? Submit via this form or tweet me at @navahf using the hashtag #AskPPC. See you next month!
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Featured image: Shutterstock / Sammby