Contributor Kevin Lee outlines how SEM campaigns can benefit from applying smarter business unit economics and asking rational questions.

A strong understanding of the economics of any business unit is absolutely critical to any digital marketing campaign managed against non-brand key performance indicators (KPIs) in a search engine marketing (SEM) campaign.

One would think any reasonably large and successful business would have a good handle on their unit economics, and that this knowledge will be shared down the chain of command to the mid and lower levels of the marketing team.

But time and time again, I have found this critical foundation is missing, miscommunicated, insufficient or is so outdated as to make it worse than worthless.  “Worthless” in this case means that bad data does no actual harm. “Worse than worthless” means the utilization of the wrong KPI goals resulting in media waste and — more importantly — missed revenue and profit opportunity.

In other words, the company’s health is at actual risk because the marketing team and the business team aren’t on the same page.  In some cases, members of the marketing team may be working at cross-purposes, using incompatible KPIs and metrics.

Silos standing in the way of marketing AI?

I had the privilege of attending a lunch recently with members of the Direct Marketing Club of New York, the Interactive Advertising Bureau (IAB), and other marketers, including MediaMath CEO Joe Zawadzki.

Although we attended the lunch to discuss the power of artificial intelligence (AI) and machine learning to solve marketing problems, the consensus was many brands aren’t ready to empower decision-making with AI.

Their organizations were often so siloed that the inertia of departments and organization charts were a big factor slowing down the adoption of AI and machine learning in terms of optimizing marketing spend. A common theme across the table was the winners and disrupters in many industries are the ones without any legacy departmental structure. These included Tesla, the Dollar Shave Club, Casper & Purple, and even Amazon.

How does this all relate to pay-per-click (PPC) search engine marketing campaigns? Well, the influence of legacy structures affects your ability to grow yourself as a marketer and business person and directly influences your ability to communicate — with rational questions — up the chain of command (while following protocol), even if those communications might decrease your own departmental budget.

Rational questions for marketers to ask

Let’s use some common KPIs as examples of how things are often done now in SEM campaigns and how one might apply smarter business unit economics by asking some rational questions in the following scenarios:

PPC account (typically retail) managed by return on advertising spend (ROAS) with last click attribution

Rational questions to ask include:

• Do we have any data that would predict which customers order more frequently?
• Do we have any data on which variables in the PPC campaign tend to attract “new to file” customers vs. returning customers?
• Do some categories of products have a significantly higher margin where a different ROAS KPI should be applied (so that the same dollar of spending generates more profit)?
• Do certain products and their associated keywords result in higher lifetime customer value (LTV)? (The same question applies to geography, time of day, mobile vs desktop, etc.)
• Should we deploy simple tests to understand the impact and attribution of other forms of paid and earned media (display, social, video/audio, etc.)? Any paid media that can be geo-targeted lends itself to such a test of incrementality. These kinds of tests often work better than attribution models that lack data points and are particularly important for search because often another marketing touch-point stimulates search behavior by the consumer. Therefore one can look not only at sales data but also at changes on brand search volume.  For example, if you double display spends in Albany, Denver, and Orlando, and both brand searches and sales happen to rise in those cities, you’ve isolated your interaction effect.  Do the same with any paid media you want to test.

PPC account managed based on last click attribution around cost per action (CPA) or lead gen

Not all businesses make the sale online, so marketing teams running campaigns used to generate leads and are given a cost-per-lead or CPA target to hit. Rational questions to ask include:

• Are all leads we see equal? This issue goes beyond the “Glengarry Glen Ross” level of good leads and bad leads, encompassing both lead conversion rate to a sale and also the value of the sale (immediate), along with lifetime customer value.  Part of that LTV discussion could revolve around churn rates (think cell phone plans and subscriptions of all types, including product and services subscriptions).
• Rather than the average cost per lead or CPA, can we be more nuanced in our optimization?

Fixed budget PPC account

Rational questions to ask include:

• What’s the marginal contribution to the business originating from extra search, social or display media? Despite nearly all online media being auctioned off in near real-time, many larger organizations like to fix their spend by channel or category. This isn’t often the right strategy. To have a conversation about where the media dollars should be allocated, estimate the marginal cost of the next KPI unit in search, social and display.  Yes, you’ll need to address all the intricacies of the interaction effects between other media and search, but PPC search is very inelastic (small changes in bidding often don’t result in position and volume change, whereas in display, depending on whether it’s retargeted or otherwise targeted, the ability to “buy your KPI” may be easier.
• Should we just add budget or take from another channel when we find opportunities? If you could buy dollar bills for $.90 (including the effort to do the transaction), would you cap your budget?  Of course not.  Neither should any business. Sometimes, when the KPI includes a LTV factor, there may be cash flow constraints that also have a time-value of money (it may take you a year to get your one dollar), but otherwise the more the better for “ninety cent dollar bills!”

There’s probably another column that could be written on the nuances of applying unit economics to marketing, but this should give you a solid start toward a good SEM campaign.