The Right Time, at the Right Price: Applying Revenue Management Principles to PPC Advertising
It’s no secret that PPC advertising is a highly crowded and competitive space. Many businesses in the same industries borrow tried-and-true strategies to get their ads to appear in search results—and one such strategy is revenue management. For online advertisers and marketers, that means honing and refining pricing around anticipated and sometimes dramatic spikes in demand and dips in supply that yield the strongest results and highest ROI for your PPC campaigns. While it takes constant adjustment, flexibility and more than a little patience, when implemented with the right technologies and approach, it can take your PPC strategy to the next level, giving a boost to performance and adding to your bottom line in the process.
So What is Revenue Management?
If you’ve worked in the travel or hospitality marketing industries, you’ve likely heard of terms such as lead capacity, revenue capacity or revenue management. Or put another way, you might have heard it like this: “Sell the right product to the right customer at the right time for the right price.”
Essentially, the principle is based on the idea that people are willing to pay more money for the same product or service when they really need it, or when there’s inventory scarcity. Businesses can take advantage of this, adjusting their prices to maximize potential revenue based on these factors.
For example, you try to book a hotel in Munich during Oktoberfest and discovers it’s double the price it was last month. Or when your friend booked her plane ticket to Seattle last week and today you’re paying 30% more to book the same flight. This is called price discrimination, and businesses use it all the time, especially when selling online, to maximize revenue and profits.
Revenue management requires anticipating consumer needs and influencing their behaviors to purchase the same products/services at a higher price than they normally might. Normally this strategy is limited to businesses that offer fixed, time-limited resources, like hotels, concert venues and airlines.
While there are a variety of market variables that can affect price fluctuations in revenue management, the potential benefits are too good to pass up.
Applying Revenue Management to PPC
PPC management is a little different from the regular revenue management strategies you see these industries utilize, but it’s based on the same concept. It’s possible to make quick, regular adjustments in price based on market variables. The only difference is that you’re trying to attract the most consumers to your website who will efficiently convert or make a purchase. Your goal is to get the cheapest cost per click with the highest potential revenue from your PPC ads.
It’s possible to optimize for this because of the way PPC bidding works. Google Ads prioritizes which ads to rank first in search results based on ad relevance and how much you bid at an auction. Advertisers that bid more money have a better chance of their ad getting placement.
But not all search engine users have the same value and revenue potential for PPC advertisers. Bid high for every relevant keyword you come across, and you’ll end up spending more money to reach both higher- and lower- quality leads. Adjust your bidding strategy based on a user’s revenue-driving potential to optimize PPC strategy.
It’s possible to understand the potential revenue value of a user based on the keyword searches they’re using. Keywords help illustrate the intention of the user, so you can bid knowing if they’re more or less likely to click through and convert. Once users do click on your ad and you pay for it, that indicates an additional level of interest as well.
Because it’s keyword-specific, every keyword is going to have historical performance data combined with bid landscape data from publishers, which when totaled, present a keyword-level relationship between the projected click volume at a given bid level. Essentially, it’s the keyword you’re targeting and the associated content you present with your ad that illustrate the level of user interest.
You can use this information to optimize your PPC strategy. Beyond that, you’ll need to optimize your landing pages and subsequent lead nurturing strategy to close the deal and realize revenue.
The Key to Success: Implementing a PPC Management Tool
Relying on revenue management principles is a valuable way to optimize your PPC campaigns to peak performance. But there’s a reason not many people in the field use this strategy: it isn’t easy to execute. You must be prepared to make small changes in your bidding strategy based on ongoing insights that come in weekly or even daily.
You could argue that the strategy is more trouble than it’s worth — too much monitoring and manpower is needed to operationalize it. But in reality, most marketing managers that use any sophisticated bid optimization strategy do so with automation, not extra people.
Using an automation technology doesn’t only make it possible to use a revenue management strategy at scale, it also helps ensure your changes are more accurate and optimized. The people that manage a normal PPC program are more likely to miss opportunities and unnecessarily waste ad spend than a machine optimized for the job.
Even a well-equipped paid search program won’t have the resources necessary to keep up with and fully take advantage of revenue management as a strategy.
Say a business has two team members of their paid search program charged with making bids and bid adjustments. In order to do this, they’d need to react to a variety of market variables to make the right bids at the right price to maximize clicks from high quality PPC leads. And these market variables are constantly changing, making last week’s evaluation irrelevant in today’s market.
They could tackle the problem by focusing their efforts on higher volume keywords. But then they must completely overlook the long tail keywords that also have optimization potential. The average SEM program actually spends with 18 percent inefficiency on keywords with few clicks or conversions.
And by focusing on reviewing higher-volume keywords, they likely wouldn’t have time to also evaluate the impact of their efforts on revenue overall. With a program having around 50,000 keywords and a goal of making 100 bid adjustments a week, they’d still end up falling behind on their PPC goals in the long run.
An automated tool, on the other hand, has the ability and capacity to calculate an optimal bid for all 50,000 keywords. It could even do this daily, regularly analyzing the latest incoming market information and using it to make accurate adjustments, regardless of how much data is coming in or how many keywords they needed to track.
Machines are already better than people at computing, so it makes sense that an automation tool would be able to better recognize patterns to take advantage of. Some opportunities are subtle, take place over large timeframes, or can contribute to other segments of that program as well. Instead of evaluating each keyword individually, an automated tool can take a portfolio approach, maximizing the marginal utility of each keyword.
Of course, using automated technology to manage PPC requires a financial investment, but it’s worthwhile if you take full advantage of the tool. Automation can help you reduce wasted ad spend and better target likely-to-convert PPC leads with your ads. Once you have an automation technology saving you money and driving revenue, it pays for itself and then some.
While revenue management isn’t a unique approach, most advertising managers aren’t taking advantage of its principles to improve their PPC program. That’s because they either don’t have the skills to try it, or know they don’t have the manpower to make the most of it.
And they’re right, of course. Revenue management is a sound economic principle that takes a lot of investment and refining to operationalize. Market factors such as time, date, location and device are constantly changing. How can they really keep up with the insights to get maximum yield?
They can’t, unless they enlist help. Adding more team members to your PPC program might help you stay on top of the task a little longer, but eventually everyone falls behind. Those serious about adding value to their PPC strategy and increasing ROI are best off investing in an automation technology to handle the changes faster, better, and with more precision.
While these fundamental economic principles might seem simple, striking the right balance for your keyword bids to generate the highest value for your organization takes time, effort and a lot of educated calculations. Achieving just the right combination will entail studying market trends and strategically leveraging a variety of factors, such as time, date, location and device, to your greatest advantage. As with almost anything else, you can’t expect to go it alone with a man-powered staff, regardless of their experience or expertise.
Those serious about mastering this strategy need to invest in an automated tool designed to fill critical knowledge gaps in your PPC program—a move that could turn around missed opportunity and wasted spend into accelerated performance and increased ROI, while opening the door to more and even better opportunities down the road.