The first thing we should do is understand the tradeoff between volume and efficiency, and why it exists. I will illustrate with an example using a hypothetical paid search acquisition campaign for Rainbow Sandals. The goal of this campaign is to sell men's sandals on the Rainbow website. Let's say this campaign only has $1 in its budget, so it will be extremely targeted. It will likely only bid on a single extremely relative keyword, such as "buy men's rainbow sandals online". People searching on this single keyword will clearly be in market, and will have a high probability of purchasing sandals on the site. This extremely targeted keyword will also have low competition, so the cost per click will be quite low. The low cost of the keyword and the highly qualified audience will lead to a very low cost per acquisition (CPA = $ spent on advertising / # pairs of men's sandals sold). This is great in terms of efficiency, but Rainbow will likely want to bring in more business than can be generated with $1 of advertising. As they put more money into the budget, at some point they will have maxed out how much they can spend on this specific keyword (there is a fixed # of people searching this term), and they will need to add a second keyword. They will now choose the second most efficient keyword. Maybe it is "buy rainbow sandals online". Now that they have removed "men's" they may get women clicking on their ads, which is not the goal of this campaign. This will result in some inefficient spend, so the new CPA will be somewhat higher than when they were only running with one keyword. Please note that keyword efficiency is just an example. The same principle applies to targeting the most efficient geographies, times of day, etc. The pattern continues as more spend is added, and your most efficient options are maxed out, creating the graph we see below, where CPA increases with volume:
Now that we understand the basic tradeoff, we should think about how the company's revenue model comes into play. Let's say that Rainbow sells their sandals for $40 a pair. At some point on the volume-efficiency curve, the CPA rises above $40, and it no longer makes sense to increase volume. [Yes, we should be looking at contribution margin, not revenue, but for the purposes of this example we will make the (clearly inaccurate) assumption that the variable costs of producing a pair of sandals is $0, so revenue and contribution margin are the same. In reality, you should use your product's contribution margin, or better yet the total lifetime value of an acquired customer]. This next chart illustrates that once CPA equals revenue, increasing your volume means your campaign will have a negative impact on your bottom line:
So we know that we must operate at a point where CPA is less than revenue. But where? The below chart brings Total Revenue, Total Cost, and Profit into the mix. There is a lot going on here, but it's not too complicated. First off, we have Total Revenue (Revenue x Volume) illustrated by the sum of the blue and yellow boxes. We also have Total Cost (CPA x Volume) illustrated by the blue box. Profit (Total Revenue - Total Cost) is illustrated by the yellow box. Your job is to maximize the size of that yellow box.
So where is your sweet spot? What level maximizes your profit? If you have not been thinking about it this way, then most likely you are not there today, and you have room to improve. You will want to find out if you are operating at CPA High, or at CPA Low. If you are at CPA High, you should trim some of the fat and scale down. If you are at CPA Low, there are additional opportunities that you are not taking advantage of.
So how do you find your profit-maximizing point? It is actually not as difficult as you might think, but that is a topic for another day.
