Introduction
Startups, and why not bigger companies, too, often test marketing channels by allocating a small budget to each channel, and then analyzing the results (e.g. CPA, cost per action) per channel.
This is done to determine a) business potential and b) channel potential. The former refers to how lucrative it is to acquire customers given their lifetime value, and the latter to how well each channel performs.
Problem
However, there is one major issue: scaling. It means that when we pour x dollars into the marketing channel in the test phase and get CPA of y dollars, will the CPA remain the same when we increase the budget to x+z dollars (say hundred times more)?
This issue can be tackled by acquiring enough data for statistical significance. This gives us confidence that the results will be similar once the budget is increased.
In AdWords, however, the scaling problem takes another form: the natural limitation of search volumes. By this I mean that at any given time, only a select number of customers are looking for a specific topic. Contrary to Facebook which has de facto an unlimited ad inventory (billions of ad impressions), Google only has a limited (although very large) ad inventory.
Solution
Here’s how to assess the scalability of AdWords campaigns:
1. Go to campaign view
2. Enable column called “Search impression share” (Modify columns –> Competitive metrics)
This will tell you how many searchers saw your ad out of all who could have seen it (this is influenced by your daily budget and bid).
In general, you want impression share to be as high as possible, given that the campaign ROI is positive. So, in general >80% is good, <10% is bad. (The exception is when running a long-tail strategy aiming for low-cost clicks, in which case <10% is okay.)
3. Calculate the scalability as follows:
scalability = clicks / impression share
For example, if you have an impression share of 40 % with which you’ve accumulated 500 clicks, by increasing your budget and bids so that you are able to capture 100% impression share, you will accumulate 1250 clicks (=500/0,40) which is the full potential of this campaign.
Limitations
Note that the formula assumes the CTR remains constant. Additionally, increasing bids may increase your CPA, so improving quality score through better ads and relevance is important to offset this effect.