Blog homeKevin May, on the Travolution Blog, raises an interesting a question about budgeting for pay per click online advertising. Pay Per Click advertising (or PPC) is where for each site visitor that a 3rd party sends you, you incur an advertising fee. Google Adsense is an example of a PPC advertising engine and so is TravelSupermarket and Cheapflights
The story that Kevin recounts is one from an ancillary firm who advertise via TravelSupermarket (see the full story) - who set a fixed advertising budget for the year. TravelSupermarket then upped their own TV advertising - leading to additional traffic to the ancillary company (each click costing money) - and the fixed advertising budget being used up. The ancillary company then had to respond and increase their prices they advertised via TravelSupermarket - to price themselves out of the website (therefore reducing their spend) - while they not fully extracting themselves from the site (presumably waiting for their budget to be refreshed the next year)
Kevin asks - what else can you do?
Frankly - lots. They need to create what is known as an “infinite” advertising budget. Even better if they can create a cash flow positive infinite budget.
Firstly some assumptions - as a website selling ancillary sales direct to consumers there is little customer retention. Yes you may get a subsequent sale to the same customer - but perhaps if they have come via TravelSupermarket originally- they will come back to you next time via TravelSupermarket - therefore costing you again. So on this assumption the entire advertising fee must be recouped by the initial commission / margin generated from the first sale (i.e. excluding any future revenue opportunities). This isn’t exactly correct - but it will do as a conservative working assumption.
Secondly, we need to know the conversion rate (paid click to sale) - helpfully Kevin has supplied information that it is 9-10%. That is within the bounds of a normal website performance.
OK - lets work this out
Lets say that an average click cost is £1.50, the average margin is 20%, the conversion is 10% (click visitor to purchase). So it costs 10 visitors @ £15 total advertising spend to generate one sale. At a margin of 20%, they are going to need to sell their product at £75 at least in order to cover the advertising. (As a side note, this is why principal travel companies can do PPC advertising not travel agents -as the margins that agents earn are not sufficient to play the same game)
If the average click cost was £1 then they need to sell product at least at £50, or if a £2 click, product at least at £100.
Why sell at zero profit?
Three reasons - firstly you can increase the volume of transactions going through your systems - leading to better negotiation (or internal efficiencies) - leading to lower costs in the future. Secondly, you could be aiming to hit a quarterly sales target (particularly for newer online companies that need to show some kind of improvement to investors - even if the investors are not wise enough to see through the figures). Thirdly - you may have an allocation that you need to move (i.e. product you have committed to purchase even if you can’t sell it)
You don’t have to sell at zero profit - this is just the edge of the curve (i.e. you take all the sales you can get that generate positive profit - as well as all of those that take zero profit - but then stop)
Therefore the conversation that the ancillary company should be having with themselves is “What percentage can we afford to spend on advertising”. Say its 15% revenue. That should be the budget - not some static “old school” way of setting budgets with a fixed annual amount.
OK I hear you say - wonderful having an “infinite” budget - but what about cashflow? If you are taking deposit payments online - and are paying your PPC advertising on credit (say 30 - 45 days), you can get yourself into a positive cash flow situation (as you are paying for your advertising after some income has been received). If you are an ancillary company selling hotels - if you are selling on the merchant model (i.e. full payment at time of reservation rather than to the hotel at time of customer checkout) - then you can really begin to generate positive cash flow from PPC. This should convince your head of finance that budget setting based on revenue percentages works better than fixed annual budgets.
Are there alternatives to the “infinite” budget? Yes - you can do what is known as traffic arbitrage. Say you have a landing page on your website that relates to an individual hotel. You have paid £1.50 to get that visitor to see the page - but they, for some reason, reject that opportunity to purchase. You can “sell” that user to someone else. If 20% of the time you can get £0.50 exit money from users the outcome looks like this
100 users clicking through to the page
10 sales (costing £15)
20 paid exits (earning £10)
All of the sudden, your 10 sales have only cost £5 advertising, which means for the original budget you can already do so much more!
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