My Ad Costs Are Rising, Should I Scale Back?

If you haven’t noticed—or you live under a rock—costs are rising everywhere. Whether you’re going out to dinner, hitting up the grocery store, or investing in the coffee industry on your morning route to work.

If you utilize pay-per-click (PPC) advertising, you may have seen your ad costs rise there as well. When it comes to analyzing the effectiveness of your PPC campaigns, one of the top metrics you should be utilizing is cost-per-conversion (CPC).

CPC measures the cost of converting someone with an interest in your product/service into a potential customer. It is calculated by taking into account the cost of your advertising campaign and dividing it by the number of conversions your business receives. For example, if a campaign costs $1000 and generates 100 phone calls to your business (or whatever is being tracked as a conversion), your CPC would be $10.

So, what do you do if you start to see the campaign that used to generate 100 phone calls now only brings in 80 (a CPC of $12.50)? Should you reduce ad spend or maybe cancel the campaign completely?

Before you do anything rash, let’s consider the factors that might be affecting your advertising results and the best strategy to move forward with your ad budget.

What Is Causing My Conversion Costs to Increase?

There are dozens of factors that might affect your cost-per-conversion. Many of them are unmanageable, but some are completely within your control. Let’s chat through a few of the most common factors that might be causing your costs to rise.

Understand How Platforms Determine the Cost of Your Ads

First, it’s important to outline a brief primer on PPC advertising costs.

Let’s say that two advertisers are bidding on the same search query. Assuming all things are equal (the wording of the prospect’s search query, the location of the user, etc.), pay-per-click advertising considers several factors on which ad to show first. Determining the bid or cost to show your ad at the top of the results page relies on which advertiser is better at addressing these factors. When determining ad placement, the search engine considers things like:

• Which advertisement best addresses the user’s search query? If you search for something specific like “How to Grow Fuji Apples” and one advertiser includes “growing Fuji apples” in their campaign and the other only includes “growing apples,” it’s safe to assume that the ad with the more specific keyword will be shown in this case.
• Which ad is a better representation of the destination the user will experience when they click its CTA (call to action)? For instance, if the CTA is “Buy Now” and the ad sends them to an informational page without an option to purchase the product the user was looking for, this would lower the ad’s ranking.
• Which web page attached to the ad is performing better? The advertising platform is more likely to promote whichever page is more technically sound (fast, responsive, etc.).
• Does the ad include extensions—like phone numbers, additional site links, ratings, etc.? In other words, is your ad using all the platform’s features that make sense to the user? This is one of the reasons why when you search for a specific query, the ads that show up on top are the ones that have all the “bells and whistles.”
• Does one advertiser have a max bid amount in place or are they willing to bid more for the types of people who search for their product/service? When you are setting up a campaign, you can tell the advertising platform how much you want to bid (which is a performance strategy all in itself) and how much more (or less) you are willing to pay for certain audiences, demographics, time frames, etc.

To outline an example of the considerations above, check out the two ads below for the search term “Dog Training Near Me.” Notice how the ad that shows up on top specifically addresses the city the user lives in, uses relevant words in its description, and includes helpful extensions that might better address the user’s query (i.e. puppy training, why in-home training, etc.).

So What Changed? Why Is Your Cost-Per-Conversion Suddenly Increased?

Let’s assume that you’ve addressed all the items above. You have a website that performs great, your ads are in good shape, and you’re utilizing copywriting best practices.

Your ads have historically performed well, but now, you have seen a noticeable dip in performance. That $10 cost-per-conversion you’ve seen for months now has suddenly jumped to $12.50. What gives?

Again, many factors might affect your performance. PPC advertising is ever-changing and managing it can often make you feel more like a weatherman than a meteorologist. In other words, while there are many ways to see exactly why things changed and how to fix them, some factors are out of your control and need to be addressed as they come up.

Some of the following things that might affect your ad performance from an objective standpoint (meteorologist) are:

• Recent changes you’ve made. Did you adjust one of your campaigns recently? Did you add a new campaign, ad group, or ad? Did you accept a recommendation from the ad platform? Did you make a change to your website? These are all things that we can look back on with analytical tools and pinpoint exactly where the cost suddenly increased.
• Updates to the advertising platform. Ad companies like Google and Facebook are always working to improve their existing platforms. Thankfully, they tend to do a good job of notifying their advertisers of updates. However, it is not uncommon to miss an email notifying you of a change they’ve made to how conversions are tracked or new features they’ve added. We can look at these changes from a neutral perspective and notice what might have occurred to increase your costs. In this case, there may be things you can do to offset the change. In the digital marketing industry, there is no shortage of online articles, videos, podcasts, and social networks that can help address these concerns. Staying on top of updates and changes can go a long way in ensuring that you don’t experience drastic changes in your costs.

We’ve discussed a few areas that you can objectively analyze and adjust, but what are some of the things that aren’t as easily controlled?

• Competition. Have new companies recently started running ads in your area or are existing companies expanding their reach? Has an existing company hired a new agency or an in-house marketer that has elevated their game? This is probably one of the more common reasons we see increases in ad spend. When more teams are in the playoffs, the more competition there is to be on top. So, how do you become a No. 1 seed in your industry? We’ll discuss that in further detail below.
• Market fluctuations. Just like the stock market, there are constant fluctuations that might affect the price to run an ad effectively. Remember when Beanie Babies, baseball cards, or more recently, vintage sneakers (see graph below) were “hot”? If you were advertising before the “boom,” you might see significant increases in the cost of advertising as factors like new competition and inflationary pricing come into play.

• Major events. Is a war or conflict affecting your industry? Was there recently a natural disaster that increased (or decreased) the need for your product or service? A recent example of this was COVID-19. As the virus negatively affected dozens of industries’ sales, some saw their sales go through the roof. An interesting example of this is landscape supply businesses. Suddenly, with everyone home looking out their windows and constantly noticing those chores that they hadn’t been able to address—coupled with the fact that many people now had extra time on their hands—interest in landscaping and related industries saw historic increases. This became especially true because this industry is not highly competitive in the ad space, so ad pricing for those companies that were advertising remained relatively unchanged.

These are just a few of the many examples of events that can affect your advertising cost-per-conversion. And while many of these examples are out of your control, there are ways you can set up your digital advertising for success.

What Can You Do to Help Your Ads Perform Better?

In the paragraphs above, we’ve discussed numerous ways to improve your ads and, hopefully, see your cost-per-conversion improve.

Things like optimizing your campaigns and ads, testing different conversion strategies, and experimenting with new ads or ad types can go a long way in helping you get to your target CPC.

Diversify Your Ads

Another helpful option might be to diversify your ad portfolio. Digital advertising is surprisingly similar to the stock market. If you put all of your eggs in one basket and that basket tips over, things can get a little rough. The same is true for advertising your business. If you put all of your advertising budget into Facebook and it begins to cost more but produce fewer conversions, it’s guaranteed to affect your business negatively.

If you start to see increases in your cost-per-conversion, it’s smart to diversify your budget to test other platforms. As an example, PHOS has a client whose primary audience is women. They were starting to see an ad platform they were using wasn’t performing as well as it once was and decided to invest part of their budget in Pinterest. For those who don’t know, Pinterest’s audience is overwhelmingly female (over 75%). Diverting some of their budget to Pinterest ads delivered an almost overnight improvement in their cost-per-conversion and return on ad spend (ROAS). To this day, Pinterest is still one of the top-performing ad platforms in their ad portfolio.

A/B Test

Lastly, A/B test your ads. Don’t just assume that you’ve created the gold standard for advertising because you followed all the best practices. Most ad platforms allow you to A/B test multiple ads against each other to see which perform better. Even if it isn’t offered by your platform of choice, we’d recommend splitting your budget between two similar but slightly different ads (slightly because the less you change, the easier it is to track what is helping/hurting your CPC). Something as simple as a different headline, updated creative, or more accurate call to action might make all the difference in how your ad performs. As generative AI becomes more and more prevalent, most ad platforms have options that help do this for you, but it should not be overlooked when considering how you can improve your cost-per-conversion.

When Does It Make Sense to Scale Back on Ads?

It is hard to say when it is best to remove or scale back on ads, but we do have a few suggestions where it might make sense.

You Are Running Brand Awareness Campaigns

First, if you are doing all the things mentioned above and are still not seeing the bottom-line results you need to keep your business profitable, it’s time to scale back on ads. In this case, perhaps it makes sense to remove some of the top-of-the-funnel ads or those that are focused solely on increasing awareness. Instead, run ads that are only focused on higher-converting audiences.

Some examples here include ads that target previous customers or people similar to them or ads focused on drawing business from your competitor’s brand. Getting your business in front of new people is very important, but if it isn’t resulting in sales, it may be worth dedicating your limited ad budget to areas that are performing better right now. It should be noted here that brand awareness is a long-term strategy and should not be evaluated over a short timeframe. Consider the lifetime value (LTV) of a customer. If running awareness ads increase the cost-per-conversion but may lead to new customers a year from now whose LTV will make up for the previous cost, it may be worth running ads at a “loss” for a time.

You Are Finding Success on Other Channels

Speaking of brand awareness, another reason to scale back on ads would be when more and more customers are coming from other, less costly sources—like SEO or “direct traffic” (direct traffic being the # of website visitors who got to your site by searching your name or URL directly into the search engine)—and off-setting the traffic you previously saw from digital advertising. PPC advertising should be a tool in your toolbox, not the only tool. It’s not uncommon to see businesses use PPC as a crutch to support their business, and then, when one of the unplanned events mentioned above happens, it cripples their business.

Ultimately, PPC has two main objectives. First, it is a way to develop your brand, and second, it should drive people to the website who might be interested in purchasing your product or service. One of the ways we evaluate whether or not it’s time to start scaling back PPC is when we see these things happening more from other traffic channels.

As an example, we work with a company that had recently rebranded and whose new name was relatively unknown in their market. For years, we put effort into optimizing PPC ads to get their new brand in front of their target audience and increase their sales. Over time, however, we noticed that while the advertising was still performing very well, they had developed a lot of interest from SEO and direct sources. As a result, they have been able to scale back their paid advertising and still improve sales. Today, they are running at about ⅓ of their original budget in the initial target area and can use that additional budget to expand into new markets across the state.

It should be noted that this formula worked for this customer because much of their business is from repeat customers and may not be recommended for your business in particular. But it provides a good example of when scaling back when be beneficial for your business.

PHOS Can Help with Your Cost-Per-Conversion Strategy

We’ve discussed a lot in this article, and we understand that it can be a little overwhelming. That’s where we come in. Whether you’d like someone to take the wheel when it comes to your business’s advertising goals or would like someone to consult your current marketing team, we’re here to help. If you need help maximizing your cost-per-conversion, don’t hesitate to give our team a call today!