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Rising CPCs are a post-covid fact. 

Amazon and Temu seem poised to keep the pressure on.  Some of our clients have seen 30-40% increases year-over-year on search-based ad types.  This does not signal impending doom for ecommerce as a whole, but there will be winners and losers as there always are when significant market changes occur.  Chasing the same strategy in a changing market creates losers, changing with the market creates winners.

 

Be the hero, not the victim

Marketers and agencies are in a position to provide valuable counsel to companies suffering from the impacts of uncontrollable CPC increases.  But too often, performance decline initiates a blame game on marketers and agencies for something neither party controls.

 

Maybe we can help.

 

There is a responsibility for the successful marketer in the face of material change to:

  1. Quantify the impact of uncontrollable CPC increases
  2. Devise a strategy in response to the uncontrollable change
  3. Successfully communicate and persuade management

Quantifying the impact of rising CPCs.

When management asks why sales and profit are down, too often we see the answer verbalized “cpc’s are up, so we’re getting less traffic.”  That is too conceptual and sounds like an excuse to an executive.  When this happens, they start trying to dig in and figure it out or form a negative opinion of the marketer or partners involved.  Not good, people get fired.

Executives need to see the quantified IMPACT.

Modeling is often the best way to visualize impact.  A model like this one below can quantify the impact of many things… changes in market demand, a promo vs. non-promo period, and in this case, the impact of rising CPC’s.

Here we have an ecommerce company in column Y1 that spends $1M on ads to drive 1.66M visits and drives 1.5M from non-paid sources.  If market conditions stay the same, revenue will continue to be $9.5M and profit will continue to be $3.75M.

 

Quantified Impact:

If CPC begins to increase by 15% per year (yellow shading), by Y5, revenue will have declined by $2.15M and profit by $1.1M, assuming NOTHING else in the business changes.  29% of company profit eliminated over something you have no control over.  Do you want to be held accountable for that?

 

Devise a strategy in response to the uncontrollable change

Here’s a strategy that some of our clients are gravitating towards that offers potential for reduced business risk and increased scale.

Adding some additional math to the previous scenario illustrates how CPA is increasing due to rising CPC’s.  The cost of acquiring each customer has increased by 75% over these 5 years:

 

Because CPC is rising despite spend being constant, we know that the ads are substantially impacted by competition.  That happens in search and shopping ads, which this firm is highly dependent upon.  Many firms are, because the higher conversion rates associated with intent-based search ads has long been the most profitable advertising option. But with the scale of CPC increases over the past few years, this is not always the case.

Audience-based advertising options include Facebook, Instagram, YouTube, TikTok, CTV and more.  These ad options are far less vulnerable to CPC escalation.  Why?  Because the opportunities there are too massive for Amazon or anyone else to monopolize and the auctions are not zero-sum. Whereas for top search positions there can only be one, this limitation doesn’t exist within audience-based targeting channels.

These channels represent a more durable sales opportunity, and the reach for scale is substantial.  Another benefit is that they typically have a significant creative component that introduces the opportunity to qualify prospects and shape their thinking in ways search and shopping ads can’t.  This can lead to better quality (higher value) customers.

But these users aren’t searching for products when they see the ads, so conversion rate is typically lower.  Sometimes in-market audiences are available, but the countless nuances of audience targeting are not the scope of this article.

Below is an illustration of how audience campaigns might work in comparison to the search and shopping campaigns.

 

As CPC’s rise, audience campaigns eventually become the more profitable and scalable opportunity.  They also add diversification to protect this brand from further decline due to uncontrollable competitor activity.  That’s a good strategy.

Before moving budget to audience campaigns, acknowledge that they do introduce unique requirements to find success:

  • They are poorly measured by click-tracking systems, and even many attribution systems we’ve reviewed.  Corrective measures aren’t merely helpful, they are necessary.
  • Audience targeting strategies range from novice to very sophisticated.
  • Creative can vary greatly in terms of what works in unique channels.  Testing of creative types, frequency and refresh cadences yields better results.
  • Sometimes the best strategy is to generate a lead, a micro-step preceding a later conversion, other times it’s to drive a conversion quickly.

Successfully communicate and persuade management

That’s your job – unless you want us to help ?

 

 

 

 

 

 

 

 

About the author

Tom Bruce is the Founder and CEO of Conversion Path, an ecommerce agency that elevates ecommerce marketers with unique tools and strategies.  In an industry where digital ad agency turnover averages 1.5 years, Conversion Path’s capabilities and partner-oriented service culture yields an average client tenure of 4.1 years due to the ability to continuously add value to clients.  Tom is a former CFO and CPA.   Conversion Path is the second agency he has formed that offers competitive advantage by aligning investment to real outcomes, as opposed to leading indicators that are commonly used and often fail to align with the outcomes that are valued BOTH by marketing and the executive level.

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