What VCs need to know about PPC

Maybe we should start with the question: Why do VCs need to know about PPC?

Well, if you’re trying to evaluate the potential of a SaaS company, it’s useful to know how much money that company could make from Google Ads… and what headwinds will restrict that earning potential.

So, in this article, I’m going to cover a few key issues/metrics you should look at and what they mean.

Note: I’m going to make two assumptions… 

#1: That the company is already using PPC. (This is aimed at growth stage investment, rather than initial stage.)

#2: That we’re focusing on Google search, rather than the display network. So, when you’re using this process, ignore data from the display network and the search partners network.

OK, with those two assumptions, let’s look at how to evaluate a PPC account.

But first, I need to explain quality score.

How to understand quality score

In my book, The PPC Multiplier Method, I have 6 chapters on quality score. I’m now going to try to sum it up in 6 bullet points:

#1: Google ranks ads according to bid price x quality score. 

#2: That means, if you double your quality score, you can halve your cost per click and keep the same ad positions. Or, more normally, you’ll leave your bids where they are and get much improved ad positions. (And much more traffic.)

#3: QS is made up of three main components: click rate, ad relevance, and landing page quality.

#4: As a general rule, if you focus on relevance – so your ad and landing page are relevant to the user’s search query and intent – you shouldn’t go too far wrong.

#5: Some keywords just get bad quality scores. For example, if you have keywords that contain a brand name and you’re not allowed to use the brand name in your ads, you’ll usually get low ad relevance. That’ll cap your quality scores at 7/10.

#6: Sometimes your ad and landing page are relevant, but Google doesn’t think so. See chapters 7 and 8 of The PPC Multiplier Method for details about this – and how to fix those problems. If you want a copy, send me an email.

OK, now you’re caught up, let’s move on to evaluating a company’s PPC potential.

Starting with…

Is the account a mess?

I mentioned that relevance is important for Quality Score.

So, the first question to ask is, does the account have good relevance?

Here’s how to answer that…

Look at the ad groups with the highest spend. 

For each group, look at the ads then look at the keywords. Are they closely-related?

The point of an ad group is to be an Ad group – i.e. every keyword in the ad group should be related to the ads.

If you’re seeing keywords that are only tangentially related to the ad, then there are account structure problems.

In which case, you can stop. Unless you get a professional to evaluate the account, all you can conclude is that the account’s performance could be a LOT better.

OK, let’s assume the structure is OK, let’s look at…

What match types are they using?

In Google Ads, there are four match types: broad, modified broad, phrase and exact.

They look like this:

accounting software

+accounting +software

“accounting software”

[accounting software]

Now, let’s go back to the highest spending ad groups. If you’re seeing exact matches and not phrase or broad, then the company is probably missing out on a lot of very good traffic.

On average, switching from exact match to using an intelligent mix of exact, phrase and broad will get you around 80% more traffic.

(Individual mileage will vary. If you want precise numbers, use the Google Keyword Planner.)

So, if you’re seeing “exact only” you can use a multiplier of 1.8 to estimate the potential market size.

Speaking of which…

How big is the market?

Assuming the company has done good keyword research, then figuring out the market size is pretty straightforward.

First you work out how many impressions they could be getting. For this, you need the column “Search Impression share.”

Impression share is the % of times their ads were shown for their keywords. 

So let’s say they have 120,000 impressions and an impression share of 60%, that means there are 200,000 possible impressions.

Now, to estimate possible clicks, don’t use the company’s click rate. Instead, you segment their campaign data using “Top v Other.”

(Click on “Segment” and choose “Top v Other.”)

“Top” is when the ads were shown at the top of the page (top 4 ads). “Other” means bottom of the page.

So, to get the potential, you want to use the “Top” clickrate and multiply it by the number of possible impressions.

So let’s say the Top clickrate is 13% and the Other clickrate is 1%, our formula would be:

200,000 impressions x 13% clickrate = 26,000 clicks.

But, because with ad testing, we can usually increase clickrate by at least 20%, add an extra 20%. We end up with 31,200.

Now, as I said earlier, if they’re using exact match, but not phrase or broad, you can multiply this number by 1.8 to estimate market size.

How many clicks are they getting?

This is the easiest step of all.

We just worked out the market size. Now we divide the number of clicks they got by the potential number of clicks. 

So let’s say, from their 100,000 impressions, they got 6,500 clicks – a click rate of 6.5%.

So we have 6,500/31,200 = 20.8%.

i.e. They’re only getting around ⅕ of the PPC traffic they could be getting.

That tells us, with the right strategy and PPC management, this company could increase their PPC traffic by 380%.

Now, of course, like anything in life, that’s easier said than done. But, at least, it gives you 

  1. A useful estimate of what’s possible.
  2. A target to aim for.

Finally, there is one more metric to think about…

What about cost?

Would 380% more clicks = 380% higher cost?

Well… it depends.

This is one of those areas where mileage will vary. 

Other than expanding your keywords, there are three ways to get more clicks. First, you can improve account structure, relevance and quality score. Second, you can improve your ads. And, finally, you can increase your bids.

Let’s take them one-by-one…

We saw earlier that fixing quality score is a way to get cheaper clicks. Going from 4/10 to 8/10 would halve your click cost. Going from 4 to 7 would cut your cost per click by 42%.

So, if you have a lot of room for improvement in your quality scores, your % increase in click cost will usually be much lower than your % increase in traffic. 

(There are exceptions, but those are so complicated, they deserve an article to themselves.)

So, what about improving ads?

You will get a quality score boost from improving your clickrate, but it’s mainly incidental. So costs and clicks will increase by similar percentages.

Finally, if you’re just using brute force to get to the top of the page – by simply increasing your bids – you’ll find your ad costs increase by far more than your traffic.

That doesn’t mean you shouldn’t want to do it. But make sure the economics of the business can support it.

(The PPC Multiplier Method has 11 chapters on how to do this.)

So, this is what – in my opinion – VCs need to know about PPC.

But, it’s hard to sum up 14 years of PPC experience in 1,300 words. So let me suggest that, if you’re thinking of investing millions of dollars in a business, it might make sense to hire a PPC specialist to thoroughly assess that company’s Google Ads account.

Steve Gibson