How expensive is online marketing?
Some of the very first questions our clients always ask at the beginning of our cooperation are: “How much is online marketing going to cost?” or “How expensive is online advertising and how much should we invest in PPC advertising?” These questions are perfectly logical and understandable. To provide answers is not always easy and straightforward, though. That’s why, we have prepared this article to give you a clear idea about investing in online marketing.
FEELING SCARED AT THE BEGINNING
Clients without prior experience with online advertising may get intimidated by the price of PPC advertising. Smaller entrepreneurs and companies count every penny, especially in these turbulent times. That’s a pure fact. On the other hand, a couple of hundreds won’t buy you much anyway.
HOW TO MAKE THE RIGHT DECISION? HOW MUCH TO INVEST?
It’s very important to understand what the costs of online marketing are. Without proper understanding, you can get easily tricked. It’s very similar to buying a fancy car without knowing anything about its operating costs. You’ll buy a used BMW (nothing against BMWs) and then you find out the consumption is 15l/100 km. In the best-case scenario, you’ll feel surprised, in the worst-case scenario, you’ll drive away from the petrol station.
So, the costs of online marketing are primarily divided into 3 parts – firstly, the cost of technical set-up of metrics and accounts, which are usually one-time payments, secondly, the actual budget for advertising aka spend, and costs to manage and optimize campaigns. Pretty simple, isn’t it? But an idea may cross your mind: Is the cost of managing campaigns and their optimization really that important? If you think so, then try to leave your bag of shopping in your BMW boot. Sooner or later, it will go bad and start to stink. The same applies to PPC campaigns. Even the best campaign will perish over some time if you don’t take good care of it. It’s simply necessary to take into account the campaign management and optimization. These costs can, however, swallow a huge part of your budget, which usually happens to smaller budgets of CZK 20-30k a month. Okay, but what’s next?
IS IT OKAY TO ASK YOURSELF A QUESTION OF HOW MUCH THE CAMPAIGNS ARE GOING TO COST?
The right question is not how much the campaigns are going to cost, but how much you want to earn. What’s the difference? It’s pretty simple, and we encounter this very often, not only with new clients who haven’t used any PPC campaign yet, but also with clients who already have some (obviously bad) experience with a marketing agency or a freelancer. The client asks us how much the campaign is going to cost, we reply the monthly minimum is CZK 40k. The client gets shocked, and says it’s too much and there’s no budget for it. But how would the client feel if the money invested brought six or ten times higher revenues? The client invests CZK 40k and earns CZK 400k in revenues. And that’s exactly what it is about.
HOW TO THINK ABOUT IT AND GET THE MOST OUT OF IT?
The money you put in PPC campaigns should be seen as an investment rather than a waste. PPC advertising has a profitable potential. Here we come to the basic principle of investing and to the famous investing trinity: risk, liquidity and return. You invest primarily because you want to get back more. The more you invest, the more you can get back. If you invest CZK 1,000 in a conservative fund, you can hardly expect to get high revenues and buy your new BMW. The same applies to investing in marketing. It’s fair to say that investment in marketing, just like any other investment, carries certain risks which can, however, be minimized. How? For example, by setting the right KPIs which will secure your investments. What is it? Go on reading.
HOW TO SECURE YOUR PPC INVESTMENT?
KPIs, “Key Performance Indicators”, are used to evaluate the campaign success. Among the basic ones, there are ROAS and PNO. These are the most important marketing indicators as they tell you how much every single crown invested in online marketing will bring back to you. What exactly do these abbreviations mean?
- ROAS (“Return on Ad Spend”) – the return on funds invested in advertising, spend, purchase of advertising.
- PNO is a Czech abbreviation for “share of turnover costs”, which is practically the inverse value of ROAS.
- ROI “Return on Investment”, i.e. net return on investment (net profit / (spend + fee + other related costs)) x 100. ROI isn’t used in marketing so frequently as it may often be misleading. Neither clients nor their marketers are able to say what ROI they have (even outside online marketing). If you know your costs exactly, and you’re able to calculate your net profit accurately, it’s a winning situation for you. In this case, using ROI is highly recommended.
HOW TO USE KPIs IN PRACTICE?
Let’s use an example for a better explanation. ROAS is easily calculated using the following formula: revenues / advertising costs. If I put CZK 30,000 into the spend / purchase of advertising space, and this will bring CZK 180,000 in revenues, my ROAS will be 6 (600%). The higher this number is, the better. If I want to calculate PNO (the inverse value), i.e. (CZK 30,000 / CZK 180,000) x 100 = 16.6%. Here, the lower the PNO value is, the better.
The issue is that there is no single correct ROAS and PNO value. While some companies are profitable at ROAS of 3 or 300% (PNO 33%) where one Czech crown invested in advertising brings 3 Czech crowns in revenues, other companies may be making a loss at ROAS of 20 or 2,000% (PNO 5%). Why is that? Usually due to very low margins.
But how to evaluate if the PNO given is profitable or loss-making for my business?
IT’S VERY IMPORTANT TO DETERMINE WHEN MY INVESTMENT IN MARKETING IS PROFITABLE, WHEN MY ADVERTISING GENERATES PROFIT AND WHEN A LOSS.
Seems logical, doesn’t it? And it’s not that difficult, either. And yet, more than 50% of companies (small, medium and large) don’t pay attention to this. Why? We don’t have a clue. Marketing agencies, which such situation is advantageous for, are usually to blame. The client is confused and the marketing agency takes advantage of its free scope of activity and almost no control from the client’s side. Instead of educating clients, marketing agencies make money on their ignorance.
DON’T BE LIKE THEM!
Determining the maximum PNO value (share of turnover costs), according to which your marketing agency can optimize your campaigns, is the basis of cooperation. Thus, even though you don’t understand all the technical details, you’re constantly in control of what’s happening to your money, and you can easily evaluate if your campaign is doing well or badly. Once you and your marketing agency know your maximum allowable PNO, you can start gaining profit. As a rule, it doesn’t make sense to limit your advertising budget to reach the maximum PNO. If you limit your advertising budget before reaching the PNO, you’ll lose money. And that would be a shame.
HOW TO CALCULATE YOUR PNO?
You need to know your margin to be able to calculate your PNO. For better understanding, let’s give another example how to determine PNO:
You sell chandeliers. One piece is CZK 10,000, the margin is 20% and your costs are CZK 3,000.
PNO calculation: (costs of CZK 3,000 / revenues of CZK 10,000) x 100 = 30%
By spending CZK 3,000 to sell a chandelier that costs CZK 10,000, your PNO is 30% (not very good). This simply means that your ad set this way puts you at a loss of 10%. If you continue like this, your business won’t last very long. This is a clear sign that your ads need to be optimized.
HOW TO SET OPTIMAL PNO?
This example has showed us that it’s not very economical to sell with PNO of 30% once your margin is 20%. Some agencies set optimal PNO to be equal to the margin, which is 20% in our case. It may happen you’ll break even. Leaving aside the case where we invest in campaigns primarily for the purposes of brand building, and taking into account performance oriented campaigns, with PNO of 20% you can even make a slight loss. How is that possible? PNO doesn’t consider refunds, returned chandeliers and other costs which should be covered by your margin. If you set a long-term PNO for 50-75% of your margin, you’ll get a buffer for your profitability. In the above-mentioned example, the recommended maximum long-term PNO should be 15%.
PNO calculation: (costs of CZK 1,500 / revenues of CZK 10,000) x 100 = 15%
WHY IS THE TIME HORIZON SO IMPORTANT?
Once setting the maximum PNO, it’s good to determine the time horizon within which you want to achieve your PNO. Every beginning is difficult, and the campaigns may not be performing as expected. PNO can thus be a little higher than your maximum value set. Both the agency and individual platforms (Google, Sklik, Facebook) are learning and looking for ways to reach the ideal customer. If you strictly insist on the maximum PNO during the entire campaign, it may happen that your campaigns won’t even start working and your investment in technical measurement set-up and campaign set-up could come in vain. It’s therefore very important to be open and always talk straight to the agency. If you think it’s a good idea to mislead the agency using a lower margin to make the agency work harder, we can assure you that you’re against yourself in this case. The rule here is clear: if you limit your budget before reaching the maximum PNO, you’ll lose your profit. And neither you nor us want this, right? =)
And one more important way to wrap up with – neither you nor us want to lose the customer. Openness and honesty is absolutely essential here.