Why is my profit margin becoming thinner as we scale?

When you increase ad spend, it's common to discover your CPL goes up or your ROAS goes down. Here's why.

Increasing our ad spend means we are targeting a larger audience.

  • This larger audience is higher up in the sales funnel, which means they aren't as ready to buy, which means they click on more ads and take longer to convert.
  • This larger audience is dominated by the big players. Competitors with a lot of money have the wiggle room necessary to over-bid on keywords because they're determined to win the click, so competing with them brings our CPC up.
  • The more we dominate the existing market, the less certain Google's algorithms will be when they show an ad. The algorithm is making educated guesses on when to try to go for the click, but when only a small portion of our audience is made up of low-hanging-fruit now the algorithm's guesswork becomes more fuzzy. We are bidding on less of a sure thing.
  • We are beginning to add "brand awareness" strategies in order to try to warm up the larger market. For example, a display ad that targets a proactive (meaning not remarketed) audience won't get many clicks, it will only get views for the most part. Big companies do this (for example Pepsi might buy a billboard even though it's expensive and doesn't contribute directly to their CPL), and it's a long-term effort to try to boost us over the competition by gaining familiarity with our brand near the top of the funnel.