Growth vs. Profitability
When considering your initial investment in paid search, you’ll have to make a fundamental decision about whether to prioritize growth or profitability.
There is no avoiding the tradeoff between these two goals for the simple reason that paid search auctions are very competitive.
This is especially so in verticals with entrenched players. These advertisers have large budgets, an established customer base, and longstanding Google Ads account histories that allow them to deploy ad spend highly effectively.
This isn’t to say a new company can’t play in the space. If your company offers products that people want, you can almost always generate transactions and revenue via investment in Google Ads. But the volume of transactions and amount of top-line revenue will each hinge on your orientation toward growth or profitability.
The decision to pursue growth or profitability will impact your return on ad spend (ROAS) target, which is the primary goal by which agencies manage paid search campaigns for eCommerce clients. All else equal, the higher your ROAS target, the more profitable your paid search effort will be. But as we’ve noted before, all else is not equal; there is direct tradeoff between ROAS and conversion volume in competitive markets.
This tradeoff is closely related to the one we’re now considering—growth versus profitability.
Growth vs Profitability
The orange line represents this tradeoff for a given advertiser. As the advertiser favors growth or profitability, it will move up or down the curve.1 Let’s consider three simple scenarios along this curve to help us better understand this tradeoff and the sort of account performance it can generate.
1. Aggressive (High Growth, Low Profitability)
The more you’re willing to sacrifice profit by adopting a lower ROAS, the more conversions you’ll be able to drive. While this orientation won’t be sustainable long-term, it can help new advertisers break into competitive verticals and can facilitate the acquisition of customers you can profitably re-engage in channels outside of paid search (e.g., email marketing.)Higher conversion volume has some paid search specific benefits, such as making possible the use of algorithmic bidding and providing more robust data sets to inform optimizations that will not only further accelerate growth, but can also be leveraged during a future transition to profitability.
2. Conservative (Low Growth, High Profitability)
Prioritizing immediate profit will come at the expense of growth in competitive verticals. With other advertisers willing to accept much lower return on ad spend, it will necessarily lower the number of placements you win in paid search auctions, which will mean fewer clicks and ultimately fewer conversions. In some ways, it’s the most sustainable strategy, though it’s still possible that a particularly aggressive and well-funded competitor could drive you from the market entirely with sustained investment.
Low conversion volume may also place certain bounds on the sophistication of the paid search strategies that can be deployed. Lack of performance data can impede bid management and other types of account optimization, further weighing down growth.
But this orientation may be an unfortunate reality for advertisers without a strong source of funding to allow for more substantial paid search investment.
3. Moderate (Medium Growth, Medium Profitability)
Clearly, this is a middle ground between the other approaches. Because the tradeoff between growth and profitability is a spectrum, there are many spaces one might occupy along the curve above reflecting different degrees of preference for growth or profit. But in the middle ground between the two approaches, you’ll inherit the benefits and downsides of both.
You’ll be better placed to defend and expand market share than more conservative advertisers, while being more sustainable than aggressive advertisers who might unexpectedly lose a source of funding. But despite the additional flexibility this position allows, you’ll still find yourself at a disadvantage to aggressive, well-funded competition, though market share erosion may be slower.
Which of these growth versus profitability orientations is best for your business will often depend on external factors that have little to do with paid search, such as access to funding, macroeconomic environment, state of the vertical, stage in the business life cycle, etc. While your paid search agency can provide competitive data and other channel-specific insights that provide additional context for thinking about strategy, the fundamental decision between growth and profitability is up to you.
Once you make a determination, it’s up to your agency to execute—developing a roadmap for how you can best pursue your strategic vision within paid search utilizing their expert knowledge of the channel.
1 We should also note that it’s possible for the curve itself to move and also change in shape (concavity/convexity.). Superior account management, UX improvements, better COGS, favorable changes in competition, etc., are just a few of the factors that can push this curve outward, i.e., make possible higher conversion volume at a given ROAS target.
Eight Oh Two Marketing is a boutique, search-marketing agency for enterprise. As the VP of Digital Advertising, Dan Pietrucha is an industry veteran. With degrees in commerce, finance and philosophy, Dan takes an analytical approach to any challenge, and you’ll often find him knee-deep in projection models and pivot tables. Click here to learn more about Eight Oh Two, our methodology and our team.
The Full Picture of Paid Search & Its Impact on Total Site Performance Direct LoadSEOPaid Search How launching paid search…
January 29, 2021
Comping Covid Making Sense of Volatile 2020 Performance in Paid Search There’s no question that 2021 will be a strange…
We love to talk shop!
And we’d love an opportunity to show you what we are made of with a complimentary audit. If you let us take a look under the hood, we’ll come back with a thorough audit of your campaigns, recommendations to optimize and opportunities to explore.
CALL US AT (802) 681-4329