Paid Traffic Ceiling?

What it is and why diversifying your traffic sources will help you make more while doing less

I am one of the hardest-working lazy people you’ll ever meet.

Maybe “lazy” isn’t the right word…I’m efficient.

I’ll do a ton of work up front so that I can have things run on autopilot in the background while still generating the results I expect.

I absolutely HATE getting caught up in the cycle of having to constantly re-do the same work over and over and over just to get the same result.

And that’s why I’m writing this post.

Every year, I run across HUNDREDS of companies that work super hard day-in and day-out to achieve results with paid traffic…but if they ever stop, their business will dry up.

The reason for this is that they’re so reliant on a single ad network (usually Facebook) that they’ve scaled it to the point where they’ve hit what I call the “Paid Traffic Ceiling.”

Here’s what the Paid Traffic Ceiling looks like:

1. They scaled to a point of spend historically that allowed them maximize their results and reach while hitting their profitability goals
2. They built the business infrastructure to support this level of scale (so there’s a lot of overhead riding behind it)
3. At this level of scale, they burn out creatives really quickly which means they have to constantly be making new creatives to keep the scale
4. If they take their foot off the gas for even one second, the acquisition will dry up and they’ll be forced to cut the business

It’s an endless, painful cycle I see so many businesses stuck in right now and they are trying desperately to find a way out.

In order to help, I thought it would be helpful to explain how the Paid Traffic Ceiling works and what you need to do to reduce the pressure.

You Be The Judge:

Before I dive into all the details, I invite you to be extremely judgmental as you read what’s down below.

We compete every day for the right to call ourselves the best which means we have to be open to new ideas, thoughts, and perspectives.

And here’s how you can voice your verdict:

1. Here on Medium, your opinion is best voiced through handclaps
2. You have the ability to clap up to 50x per post
3. If you think this post sucks, don’t clap at all
4. If you think it’s one of the best things you ever read, clap 50x
5. And if you have something to say, leave us a comment because we want to know what we’re doing well and how we can improve

Your opinion will help us understand which content we should make more of and which we should throw away and never do again.

Thanks for your time, let’s get to it.

The Math Behind The Paid Traffic Ceiling

I know math isn’t likely your favorite subject (it’s not mine either) so don’t worry, I won’t go into a PhD lecture about it.

To keep it simple, let’s use pictures.

The Paid Traffic Ceiling is the point where you aren’t making money any longer

The paid traffic ceiling is the point where your cost per user(or lead or customer) is equal to the earnings for that same unit of measure.

If you have a simple e-commerce business, that would mean your cost per customer is equal to the profit you make off of every transaction.

If you have a more sophisticated backend and a high customer lifetime value (LTV), that would mean your cost per customer is equivalent to the entire LTV of the average customer.

Now, most businesses aren’t willing to just breakeven…they want to make some sort of profit margin which LOWERS the ceiling to look something like this:

Your profit margin goals LOWER the ceiling

But you have to make money otherwise what’s the point of running a business, so understand that knowing your numbers and sticking to them is key.

Ok, so now we have the ceiling…how do we actually reach it from a paid traffic perspective?

Well, that’s where we have to look at all of the levers that are involved in the sales process to understand how we reach the limit.

Here’s a quick diagram that shows you how we get here:

The levers that get us to the Paid Traffic Ceiling

Ok, so our big levers are:

• Cost Per Thousand Impressions (CPM)
• Clickthrough Rate (CTR)
• Conversion Rate (CVR)
• Cost To Acquire A Customer (CAC)
• Lifetime Value (LTV)

But the problem is that we don’t control all of these levers.

Yes, we can influence the majority of them but the fact of the matter is that one particular lever is NOT something we have a ton of influence over (and it impacts everything).

Here’s an updated version of the last graphic to demonstrate:

As you can see, CPM is colored red because it’s a metric we don’t have any control over.

CTR, CVR, and LTV are green because we have a ton of ability to influence these.

And CPC, CAC, and Profit are colored orange because they are a combination of metrics we do and do not have control over (I know green + red = yellow…yellow is just tough to see).

I could go for a year long rant on all the ways we can positively influence CTR, CVR, and LTV…but that’s an entirely different topic.

What we need to focus on are the forces that NEGATIVELY impact CPM and cause you to reach the ceiling faster.

The Problems With CPMs:

I’m sure you were aware that CPMs are a problem for you…but I’m not 100% certain that you understand ALL the reasons they’re a problem so I want to cover them quickly.

Problem #1: More Competition, Higher CPMs

The obvious problem that people are seeing on Facebook is that the more advertisers that are in the auction, the higher the CPMs get.

This is something you have ZERO control over so it’s not worth talking more about.

Problem #2: Limited Inventory, Higher CPMs

The second problem with CPMs is that they are highly reliant on the amount of inventory available for advertisers (places to serve your ads).

Ad networks like Facebook, Instagram, and Twitter (feed centric platforms) are awesome because they reduce your need to target placements (e.g. you only really serve ads in someone’s feed), so they help you find profit much quicker.

The downside, however, is that feed inventory is fixed…so the more advertisers there are, the more quickly CPM increases happen.

That’s why networks like YouTube, TikTok, Snapchat, and Google Display Network (placement centric platforms) are awesome…because the inventory is big and constantly growing as people upload more content.

That’s why finding a mix between feed-centric and placement-centric ad platforms is important.

Problem #3: The More You Spend, The Higher Your CPMs:

The final and possibly most frustrating part of the CPM equation is that CPMs actually work the OPPOSITE of most everything else when you scale.

For the vast majority of business, as you spend more on something, you get a break on costs known as “economies of scale.”

But with online advertising, that’s not really how things work.

Yes, you could do a massive fixed buy on inventory to get a price break (this is how companies that spend billions on advertising keep their numbers in line).

But for the “little guys” that are doing direct response advertising, we actually get charged more as we spend more.

The reason for this has to do with RELEVANCE/QUALITY scores.

It all started with Google a long time ago when they decided to put a score on how relevant your ads were to customers (which is a great thing in most cases).

The more relevant your ad was to what a person was searching for, the better you did in the auction and the cheaper you go the clicks.

A big part of the way auctions work these days is by determining how many people engage with your ad.

The more engagement, the better the pricing.

But as you scale your ad spend to reach more people, the engagement is likely to go DOWN, which means your quality score will go DOWN, which means your pricing (CPM) will go UP.

Quality scores are great when you have targeted campaigns but are a real pain at scale (can’t have your cake and eat it too I guess).

So those are the facts about CPMs…we can’t control them but we can understand them.

But now let’s talk about how companies are CURRENTLY responding to them…and how they COULD be responding to them.

The Single-Legged Stool Response:

For companies that are only leveraging a single ad network to acquire customers, they are at the mercy of the CPMs.

Let’s use Facebook ads as an example.

Facebook Ads YoY Advertising Revenue from Statista

As you can see, the revenues keep going up and up and up meaning more advertisers are spending more money on the platform.

Now they have added new placements, users, and inventory so the increase in CPMs doesn’t look exactly like this…but it follows a similar trajectory.

So what that means for you is that CPMs have increased every year (I know you know that) and have forced you to take these actions:

• Constant iterations of creatives to work to get your CTR up (a metric you can control)
• Constant iterations on your website to work to get your CVR up (a metric you can control)
• Constant iterations on your back end to work to get your LTV up (a metric you can control)

All of these are GREAT activities that SHOULD be taking place…but here’s the problem.

Since you are so reliant on a single traffic source, you HAVE to find wins regularly to make your numbers work.

And that’s not really how business works.

Yes, there are often some quick wins in the process but sometimes a big win on LTV takes months or years to identify, develop, and execute.

But when CPMs jump 20% in a month, you don’t have time to find a win so you end up doing one of two things:

• Implementing a short-sighted fix (discounting, shady tactics, spamming your list)
• Or you reduce your acquisition which forces you to reduce the size of your company

Neither of those things is desirable which is why I want to discuss what I think you SHOULD be working on right now.

The Multi-Legged Stool Approach

If there’s one rule I’ve learned during my time in online advertising, it’s this:

CPMs will always go up. Always.

So instead of fighting it, I work with my clients on figuring out how to diversity their traffic sources to build a multi-legged stool that allows us to combat rising CPMs by diversifying the reliance on a single channel.

Example of multi-legged stool from a current client

The client I’ve show above was spending 98% of their budget on Facebook when I took over the account.

In just 3 weeks, I was able to get their Facebook spend to be just 66% of their spend and in the next three months, I will get it to be below 50%.

We haven’t cracked all of the ad networks yet and some of them won’t work at all…but putting a concerted effort into diversifying NOW will help us better combat CPMs as prices start to rise.

Now I’m not going to get into HOW I do this (that’s another long post) but I want to talk about the advantages that diversifying has.

Advantage #1: We Are Reaching More New Customers

Your customer interacts all over the web so acting like they are only on Facebook is insane.

If you put in some time to doing some research about your customers, you can find different ways to reach them.

Some will be big wins (lots of customers at scale), some will be small (only 10 or 20 clicks per day) but all of them will add up over time.

As we’ve shifted to these other ad networks, I’ve seen more than 95% of sessions from them be entirely new…which means we’re not recycling the same old traffic day after day.

Advantage #2: We Can But In Bid Caps To Control Costs

While you don’t have any control over CPMs, you DO have control over how much you bid in the auction.

We install bid caps as frequently as possible for our clients because it allows us to deliver sales that hit their PROFIT goals.

Yes, bid caps (and cost caps) will reduce your spending WITHOUT QUESTION but they will ensure you hit your numbers.

We’ve found that expanding to three to five networks and installing bid caps has helped us spend the same amount of money as an “uncapped spend” on a single network but with our results being far more profitable.

Advantage #3: Enterprise Value

If you’re looking to get an investment or to sell your business, investors are terrified of one-legged stools.

They’re not good bets because they have a single point of failure that could topple everything.

So if you have any desire to sell your business, diversify now before the CPMs on Facebook get you.

Advantage #4: Learning How To Make Other Traffic Sources Convert

My favorite part of trying new ad networks is learning how to make them convert.

We have a saying here at SluiceBox:

If you can only sell on one ad network, you can’t sell.

That’s why every day we show up ready to challenge ourselves to test something new and figure out how to make another traffic channel work.

Because once you learn how to do it, you can find a bunch of other ad networks with traffic that’s a similar “temperature” and make sales there.

It’s truly the most valuable skill I’ve ever learned and I still have many more ad networks to master.

Conclusion:

While I know this was a long post, I hope it helped you see that you DO have control over your destiny with paid traffic.

You just have to understand that every ad network has a ceiling and in order for you to keep growing, you need to stack them one after another.

Best of luck!

So what’s your verdict?

Earlier we asked you to read this article critically to help us understand what we’re doing well and how we can get better.

So what grade did we earn?

1. If you thought the article was weak, don’t clap at all
2. If it knocked your socks off, give us a 50x clap.
3. And if you have something that was a lightbulb moment or felt was off, leave a comment and let us know

Thanks for your opinion, we really value it as it helps us understand how to keep getting better.