Google Ads and Diminishing Returns on PPC

Google Ads and Diminishing Returns on PPC

Google Ads can be a great way to reach new potential customers. However, there’s a problem: it’s not always fully scalable. As with most advertising, pay-per-click (PPC) ads are subject to the law of diminishing returns.

Google Ads can be a great way to reach new potential customers. Everybody searches for products and services online, and Google’s share of the search market is practically a monopoly (nearly 92%, with their nearest competitor at less than 3%!). Google’s revenue strategy is to put paid ads in positions that get seen first by searchers, which means that buying Google ads can sometimes yield a lot better returns than search engine optimization.

However, there’s a problem: it’s not always fully scalable. As with most advertising, (PPC) ads are subject to the law of diminishing returns. Here’s why PPC yields diminishing returns and how you can sidestep it to maximize the value of your increased ad spending.

What Is the Law of Diminishing Returns?

The law of diminishing returns is fairly simple. It states that the more money you put into something, the lower your marginal gain.

For example, let’s say that you normally spend $500 a month on your PPC campaign, and that yields you 200 clicks, which turn into 50 sales of your $100 widgets. Wow, you say, this is great.

Double the budget!

So the next month, you spend $1000 on your PPC campaign, which gets you 300 clicks and 60 sales. You still made money on the additional investment, so you decide to increase your PPC budget still further.

The third month, you spend $1500 on your PPC campaign, which gets you 350 clicks and 63 sales. Overall, you still made money on your PPC campaign, but your return on ROI was much lower (about 4:1, instead of 10:1). Worse, you actually lost money on the last $500 you put in.

This is the law of diminishing returns, and it tells us that, sooner or later, it stops making sense to increase your PPC budget.

Why PPC Campaigns Experience Diminishing Returns

So why does your PPC campaign have diminishing returns? There are many potential reasons. First, there’s market saturation. There are only so many people out there who are looking to buy your widget at any given time. Advertising can increase that number, but eventually you will be spending money to put your ad in front of people who aren’t going to buy your widget no matter what, though they may click on it out of curiosity.
Another problem is that to spend your PPC dollars, you are probably going after more keywords. If you started with your best-selling keywords, expanding to new keywords will mean that you are paying more for fewer clicks and fewer sales. That’s in part because Google knows these keywords aren’t as good for you. They know fewer people are going to click on your ads, so they are going to charge you more for them. They don’t want to lose money because fewer people click.

Even worse, this can lead to a death spiral for your PPC campaign. As fewer people click on your ad, the quality score for your ad starts to go down. Because this leads Google to expect fewer people to click on your ad overall, they start charging your more for all keywords, even those that used to be your bread-and-butter.
Unlike most advertising, dabbling in the territory of diminishing returns for PPC can carry lasting consequences for your future campaigns.

How to Improve Your Marginal Returns

Although there’s no way to completely avoid the rule of diminishing returns, there are ways to reduce its impact and get more for your increases in PPC spend.

One of the most important is to create new ads when you want to expand into new keywords, geographic territories, or market segments. Having new ads helps you in several ways. First, the new ads can be targeted to the market segments, keywords, or localizations that you’re expanding into. This can improve your click-through rate for these campaign expansions, which improves your quality score and reduces the bid cost on your ads. Second, because these are separate ads, if they don’t perform as well, it doesn’t impact the quality score for your main ads, so you can shut these off without further repercussions. Yes, there’s a cost associated with making a new ad, but it’s all up-front.

Another good strategy is to target people earlier in the buying cycle. You might be used to acquiring leads who are ready to buy, but it might be worthwhile targeting people who are still trying to decide if they want what you have to offer.

The advantage of this strategy is that keywords linked to lower commitment levels are cheaper. You can significantly reduce your cost per lead. Even if fewer of these leads convert, you might still end up ahead, especially if your website has a < a href="">well-designed sales funnel.

We Can Help You Find the Optimal Spend for Your PPC

There’s no way to avoid the law of diminishing returns. It’s an economic reality for all areas of the marketplace. However, we can help you carefully assess your point of diminishing returns and find the optimal spend on Google ads to achieve your goals.

To learn more about our approach to PPC campaigns, and how we can help you be successful, please contact Vea Technologies today.