For business people who have limited search marketing experience, the daily budget would seem to be the attribute of a search marketing campaign that is most familiar and obvious to deal with. Advertisers typically have a certain, fixed set of funds available for search marketing efforts - probably a monthly or quarterly budget - and when you divide that up by the number of days, you get a daily budget.
While determining how much you want to spend during your budget interval and regulating your spending according is important to any advertising campaign, I will argue that the daily budget setting in an SEM campaign is not really the place where you want to do this. Instead, you should do this by optimizing your CPC bids.
Budget Management Through Optimal Bidding
Assume for a moment a world in which campaign daily budgets did not exist, in which no fixed cap could be placed on your spending. In this world, a search marketing system like Google AdWords is like a complex ecosystem. Advertisers are all competing in parallel for positions and impressions and clicks. Advertisers who bid more get more impressions and more clicks, and they spend more. As the advertiser, you exert control on your cost and click volume by making subtle adjustments to your CPC bids, a process usually known as "optimization". Optimization is the process of getting you the most, highest-quality clicks for your money, given the constraints of the rest of the system. If you want to spend an average of $100 per day on Google AdWords during a given month, you can do this by bidding just high enough that you get an average of $100 worth of clicks, but low enough that you do not exceed $100. In this "optimal" scenario, you are paying as little as possible for your clicks, while still exactly reaching your desired budget.
Of course, one downside of this type of budget management is that it is hard and labor intensive, especially early on when you're still working out the kinks and optimizing things, but the amount of effort involved in this type of budget management does go down as your campaign becomes better optimized. Another disadvantage with this type of budget management is that on high traffic days, you will spend more, and on low traffic days you will spend less -- rather than spending the same amount every day, you will spend slightly more or slightly less depending on natural market factors, and these numbers will have to average out to your desired spend level. Returning to the real world in which we do have daily budgets, this requires setting the daily budget slightly higher than what you actually hope to spend.
If You Are Hitting Your Daily Budget, You Are Paying Too Much for Your Clicks
Now let's consider an alternative scenario, one that may be more familiar, in which you set your daily budget at exactly the amount that you want to spend each day. This scenario is more convenient, because we don't really have to worry about whether we've optimized our bids. We can grossly over-bid, and pay too much for our clicks, but we don't end up out-spending our budget. Let's start with the same hypothetical campaign mentioned above, the one whose bids are perfectly optimized to exactly hit that $100 a day average. You set your daily budget at $100. Now, on high-traffic Tuesdays, you will exactly use up your daily budget, but you will stop receiving clicks sometime before the end of the day. But on low-traffic Sundays, you will not be able to spend the whole budget. So then, if you see you are not using up your entire budget, you will come to the natural conclusion that you need to bid more in order to get more traffic and spend more. So you go in and increase all the bids. This will "fix" the problem that you have on Sundays, but it will exacerbate the problems that you have on Tuesdays, because on Tuesday you were already paying too much for clicks and running out of budget too early.
Budget Management Through Bids vs. Through Daily Budget
At the end of the month, if we compare the first scenario (budget management through bid optimization) to the second (budget management through daily budgets), we will find the following:
The second situation is very typical in SEM campaigns managemed by novice Search Engine Marketers, or by large ad agencies who are held accountable for spending the whole budget but not necessarily for producing optimal results. Doing SEM budget management indirectly through the CPC bids requires more time and care. However, it is the only way to get the most out of your SEM spend.
Daily Budget is a Backup Budget Management Method
All of this is not to say that the daily budget parameter is meaningless, or should be ignored and set arbitrarily high. The daily budget is important as a security measure, to keep you from spending way too much on any given day. In cases such as sudden fraudulent activity, unexpected shifts in the market, the daily budget will prevent any serious damage by capping your spending at a reasonable amount. What is a reasonable amount, though? To keep you daily budget from getting in the way of your optimizations, but to still reap its protective benefits, it should be set just higher than the amount that you typically spend on your best, busiest, highest-traffic days.
For new campaigns, in the short term, you may want to use the daily budget to keep spending under control, but in the long term, you should optimize the bids and not let a fixed budget cap interfere.
Ehren, Clickable SEM GuruNote: Clickable employees volunteer several hours a week to helping other search marketers succeed. “Clickable Gurus” participate in numerous online search communities to provide straightforward answers to numerous questions, and, each week, one of the gurus posts a search marketing tip to the Clickable Blog.
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