how to calculate the point of diminishing return on your ppc campaigns
How do you know how hard to push your PPC campaigns? If you’re under your target cost per acquisition (CPA), surely you can keep going?
Well actually, the answer is no. There comes a point when those extra sales are more costly to your business. But by calculating the point of diminishing return, you can quickly tell whether those sales are worth it or not. And the best part? There is a really quick and easy formula that helps you understand if your campaigns are as efficient as you want them to be.
what is the point of diminishing return?
The point of diminishing return is an economic principle but let’s apply it directly to a PPC campaign example. If you continue putting more budget into your campaign but your coverage stays the same, at some point, your conversion rate will go down and your CPA will go up.
In other words, after a certain point, the rate of profit from your investment cannot continue increasing if other variables remain the same. Doubling your budget does not always mean doubling your sales. Trying different tactics to increase coverage such as adding more keywords and exploring different channels may be more beneficial than increasing your budget. In doing so, your variables are not constant and you can avoid the point of diminishing return.
how to calculate the point of diminishing return
To easily illustrate how to calculate the diminishing point of return, lets mock-up a quick example based on two months of comparable spend. If in the first month, 10 sales were produced at approximately £50 per sale, that equals an overall spend of £500 for that month.
In the second month, we produced 11 sales at approximately £60 per sale equalling an overall spend of £600. Let’s say we are working to a CPA target of £75. In this case, as an account, we are hitting this target.
Next, we apply the math behind the point of diminishing return. Firstly, take the overall spend from each month:
10 x 50 = £500 spend
11 x 60 = £660 spend
Then subtract the £500 spend from the £660 spend and you can instantly see the account only received one additional sale for that £160. As such, the account has exceeded the point of diminishing returning as the CPA has gone over the £75 target which doesn’t make that sale worthwhile.
It’s a very simple formula and one that can be applied to your own account to understand whether your PPC campaigns are performing efficiently. In many cases, you need to do more than just raising your budget to see results.
If you would like to find out how you can optimise the performance of your campaigns, get in touch.