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Using Flexible Budgets to Optimize for Profit

In the last blog, we covered some basics on Profit and discussed why it is the best metric to measure advertising performance. But this begs the question, how do we begin to optimize our advertising to maximize profit? Today we’ll discuss how we can use flexible budgets to maximize profitability.

Let’s start with a scenario: you’re running a business and investing in Google Ads. Your company is selling Product A and the advertising is profitable. However, it seems there are people in the marketplace that you’re not reaching with the current $10,000 monthly budget.

This is already a big investment in advertising, and you’re wary to increase the budget further. What should you do moving forward?

The first thing to understand is the relationship between cost and revenue (i.e. profit). Profit is the financial gain for your business - it’s money that is left over after all the costs are accounted for. Profit makes your bank account grow and gives you the flexibility to invest in things like new employees, R&D, and even new infrastructure.

Would you invest $1 in advertising to make $100 in profit? How about spending $1 to make $1 in profit? The answer to both questions should be yes! Profit is profit at the end of the day, and the more you have, the more you can invest back into your company.

In reality, the advertising costs will change with each new customer you have and each product sold. In some cases, you may spend very little on advertising to sell a product. In other cases, you may spend quite a bit. But both situations create real profit for the business and should be looked at with all seriousness.

Circling back to our example, your business is investing $10,000 per month in advertising with Google Ads, but there is a good chance the ads aren’t reaching all the potential customers in the marketplace.

The best way to tell is by analyzing the Impression Share report within Google Ads. Impression share measures the total number of times your ad showed up vs. the times it could have shown up. Here’s the formula for Impression Share:

Impression Share = Impressions ÷ Total Eligible Impressions

Let’s say you have an impression share of 40% for your Search campaigns. This means that for every 100 searches for your business or product, you only showed ads 40 times.

This scenario often happens with “Category Laggards.” The term describes businesses that have an efficiency mindset and fixed budgets. Think back to the last blog, where customers were looking to optimize for ROI, cost / conversion, ROAS, or even reach rather than profitability. Category Laggards often times use these metrics to measure the efficiency of their campaigns, and set a fixed budget by which to operate.

The graph below, compliments of Google, describes this scenario in detail. Category Laggards are missing out on potential customers because their impression share is less than 100%. Remember that customers are searching for your keywords (meaning they are searching for your business or products). The customer is showing intent in finding your business, so why not show up?

To recap, your business is running Advertising on Google Ads with a 40% Impression Share and a $10,000 advertising budget that is profitable. What’s the next step?

The general idea is to gradually step up the budget, moving from a Category Laggard to a Category Leader. During the process of stepping up the budget, keep an eye on profit. If profit increases, continue to increase your budget until profit is maximized.

We can describe this scenario as moving up the profit curve. The graph below (compliments of Google) describes the situation. The yellow dot represents the Category Laggards. As budgets increase, they slide up the profitability curve towards the point of maximum profitability.

Maximum profitability is a pretty straightforward point to find: if you increase budget and profit does not increase, you have maximized profitability.

It goes without saying, your business does not want to move beyond this point. This is the point of diminishing returns, where the increase in ad spend will offset any profit gains. In essence, the advertising won’t make you any more money.

Venturing down the road of profit maximization can take courage. Moving to a model of flexible budgets often goes against the ideals of running a successful business, where controlling costs is paramount to creating profitability.

But think of it this way: with an impression share of less than 100%, there is profit out there for your business. Sometimes it just requires spending more to make more.

If you have any questions about profit maximization or would like help implementing, reach out to Makalu Marketing to discuss in more detail.

Stay tuned for our next blog!

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