Why would a business want to cap their Adwords budget?

[richdan]

If a business has an unlimited supply of product and an unlimited capacity to distribute that product why would they want to limit their Adwords campaign budget?

If your Cost per Acquisition for a conversion is lower than the Customer Lifetime Value for any given keyword bid, why would you want to prevent your campaign from reaching as many people as possible?

Thanks in advance

Danny

[EGOL]

Low IQ.

[richdan]

That was my first instinct, but considering how many agencies are working with capped campaign budgets there must surely be some other explanation?

I must be missing something here

[EGOL]

I must be missing something here.

Danny.   You are right.   Bet on yourself.  Bet big.

[richdan]

LOL

[KevinBudzynski]

Out of fear (of something new) and not understanding. As most of us know, educating some SMB's on the benefits of an uncapped budget is a chore and many are not receptive on learning about it. On the flip side, this works to the benefit of others that do not cap their budget.

[EGOL]

When they stop bidding, they are making opportunity for all of their competitors.  I hope that this weakness of mind persists.  They should be trying to run us out of business.

[richdan]

I don't doubt you guys at all but I would really love to know if there is any alternative (and logical) point of view on this.

Budget capping is so prevalent here in the UK and with businesses of all sizes that I worry that I might be giving clients the wrong advice.

[KevinBudzynski]

It comes down to having data demonstrating the value and properly communicating this with the client. Without good data, it's difficult to show the value. Even if you had this data, communicating this value can be difficult because acquisition costs can easily exceeds CLV in the short term (as CLV will hopefully grow). Once there is a tipping point (where CLV exceeds acquisition costs) it's much easier to show value. So clients may see a short-term loss and attempts to minimize their exposure by capping their ppc budget.

[EGOL]

**It comes down to having data demonstrating the value and properly communicating this with the client. **

That makes perfect sense when starting out.   I hold the opinion that many if not most businesses are not able to make a profit at PPC given the competitiveness of PPC and the cost advantages (shipping, inventory, labor efficiency, etc) of large companies.  If you don't do careful math you can happily bid yourself into bankruptcy.

So, telling the client to test with a budget amount to prove that they can make a profit makes sense.  But once that is demonstrated they should not be budgeting.

The only exception (and this is not a budget) is when you are looking for the sweet spont of "maximum profit per day".  That is the intersction of sales volume and bid costs that has the highest yield per unit of time.

[Alick300]

Hi Danny,

IMO in such case we need to educate the client that by limited budget campaign loosing Impression Share, loosing clicks, loosing conversion.

Having enough budget will allow us to always be shown throughout the day or time we need to be shown. A very strong reason why most campaigns fail is due to the ads not being shown throughout the day since they are limited by budget. This results in lost impression share which means lost clicks, which means lost potential leads or sales.

In short Lost Impression Share, Lost Clicks, Lost Conversions = Campaign Failure

Thanks

[JasmineA]

While I do agree that there are difficulties in explaining the value to clients, the most common reasons I have come up across are accounting & cash flow.

When I was managing agency side and I just wanted an additonal $1000/mo (which seems like nothing for most advertisers), there was significant push back. One reason is the client is not only footing the bill for their account, they are also footing the agency bill. There could be added costs when expanding budgets depending on the pricing structure, and everyone wants everything as cheap as they can get it. So if the added cost of the agency + the added cost on the business for the advertising is too much in comparison to the budget the business had put forward for the year, then there is no way they can plan on spending more.

In addition to this, if you are working with smaller businesses, they don't have the flexibility in their cash flow to spend more even when there is a proven opportunity. Not to mention, advertising is very likely not the only bill they are paying each month. They have all the costs associated from man power to tools & software internally to operational overhead. They might say their profit is $65/item but it might actually be more like $15 after everything else is accounted for. Which is poor planning and communication from your client.

If you are working with a larger or public company, accounting requires that you bring in X amount of money (because Stock Market or Parent Company, or Investors, etc). If you are advertising based on LTV (lifetime value) not New Sales, then the accounting team doesn't see the same return you are assuming you are getting. It appears to the accounting team that you are overspending and not getting the same value on more cost compared to previous years.

But, take your client out for a beer if you can. Get them to unload on you about the issues and tribulations that they are coming up across internally or if the company does have a cash flow issue. There are real business reasons behind not spending more, and it might be as minor as "we are exploring another channel that is proving to be quite costly right now" and wont' have anything to do with you or your work.

Good luck! This is the hard part of consulting

[richdan]

Thanks Jasmine

Great answer and one to which I can completely relate.

I have been consulting now for approx. five years. One of the things I have found interesting is the degree to which so many businesses  hamper their own growth through pointless bureaucracy, internal politics and employees who put their personal career progression above the needs of their employer.