Efficient Frontier Insights

Optimally spending your advertising budget

Advertisers are often given a budget to spend for the month with the goal of maximizing revenues for the budget. The question is: What is the best way to spend over the month? Should one,
(a) Spend varying amounts over the month, frequently adjusting the budget for the day, or
(b) Spend the same amount everyday while accounting for day of the week effects

The answer almost always is (b). Barring dramatic changes in the marketplace, it is always best to try and spend to an average daily target for the entire month. The reason has more to do with the basic mathematics of the law of diminishing returns than with any sophisticated marketing strategy.

Consider the following example. You have $3000 to spend over three days. Being a smart advertiser, you have predictive modeling based automotive bidding technology at hand. As a result, you have built an efficient frontier as shown below.



A simple strategy of spending $1000 daily would return $3,975 in revenue everyday for an ROI of 398%. However, if we were to spend $500 on the first day, then $1000 and $1500 on the third day (to make up the $500 spending shortfall on the first day) you would only get a 389% ROI. The numbers are shown in Figure 2.





Why? Due to the law of diminishing returns, the incremental ROI always decreases the more you spend. In figure (1), for a $500 increase in spend from $500 to $1000, one gets only $1,352 in revenue, but for a further $500 increase in spend from $1,000 to $1,500, one gets only $1,095 in revenue. Hence, if we spend less than the $1,000 daily target we cannot completely make up for the lost revenue by increasing spend to $1500 for a day. The incremental revenue always diminishes with incremental spend. Therefore, the simple strategy of maintaining a stable daily spend wins.

Things to keep in mind: The analysis above assumes that the efficient frontier is stable. While this is generally true, the efficient frontier usually shifts on the weekends, hence budgets should be adjusted for the weekends. Budgets should also be adjusted for short term seasonality such as promotions and sales as the efficient frontier shifts dramatically in these times.

~ by Dr. Siddharth Shah

Speaking at SMX London – Latest Stats About The Search Engines

Merinda Peppard, Efficient Frontier’s European Marketing Manager spoke today to an 80 strong crowd at the combined SMX London and eMetrics conference on Monday. Changing dates seems to have worked in favour for SMX, which has suffered light attendance in the past. The break out areas were a sea of networking as the large delegation took advantage of the extended break times. Great lunch too! Speaking on a panel together with Linus Gregoriadis from Econsultancy, amongst others, Merinda presented the key findings from the Efficient Frontier Q1 2009, Search Engine Performance Report.

It was interesting that Econsultancy presented their Search Engine Marketing Benchmark Report which states that only 44% of Search advertisers use Yahoo and only 30% use Microsoft. Efficient Frontier certainly sees good results on both engines and our Q1 2009, Search Engine Performance Report shows our sample set of advertisers spend on average:

• 80.6% of entire search budgets on Google Search

• 9.5% of entire search budgets on Yahoo Search

• 6% of entire search budgets on Google Content

• 3.9% of entire search budgets on Microsoft Live Search

So there is something amiss here. If an advertiser spends £100,000 per month on paid search, then Efficient Frontier allocates close to £10K on Yahoo and £4K on Microsoft. This is still significant spend for any advertiser. Since our portfolio optimisation technology only calculates the split of share between engines based on mathematical tradeoffs, surely those advertisers surveyed by Econsultancy are missing out on good ROI from Microsoft Live Search and Yahoo? Certainly it is essential not to treat the search engines the same, a recommendation which we posted previously on our blog.  For serious advertisers, Yahoo and Microsoft Live Search should be considered, and engine budgets need to be fluid in order to allow for dynamic performance shifts.

If you did not attend SMX London and you would like a copy of Merinda’s presentation, please contact us on sales-europe@efrontier.com