Retargeting Ads: Don't Overpay for Customers

You may hear that retargeting provides amazing click-through rates, higher conversion rates and better ROI. (See CMO, OkDork, PPC Mode, Hubspot.) These bastions of marketing knowledge are misleading you! One thing that’s missing is that advertisers may be overpaying for customers coming from retargeting ads. As a rule of thumb, you should only pay about 10% of the CPA for retargeted ads than what you’d be paying for a truly new customer. First, let’s cover the basics then I’ll explain why.

What Is Retargeting and Why Is It Useful?

You may have experienced this yourself as a consumer. Let’s say you visited a website to buy a new bicycle. You even added one you liked to your online shopping cart, but got distracted. Or you weren’t quite ready to buy it and left it there. Here’s where clever retargeting ads come in.

For a predetermined amount of time, you see a display ad for this specific bike following you around on the internet — by your email inbox, on news websites, or in your Facebook news feed. By tagging your visit to the product page and shopping cart, the advertiser knows you are interested in that product and is keen to remind you about it.

Retargeting is useful because seeing the “reminder” ads may push a consumer, who was on the edge of buying, to cross over and make the purchase. Clearly, this type of advertising is more effective than showing ads to people who may not be interested in your products.

What Should You Be Paying for Retargeting Ads?

Retargeting ad providers sell ad space by CPM (cost per 1,000 impressions), CPC (cost per click) or CPA (cost per acquisition). The most effective campaigns are optimized on a CPA basis, where the advertiser only pays when the consumer actually “converted” or took a desired action, such as making a purchase. The trick here is figuring out how much to pay for customers coming through retargeting ads. In reality, you end up paying for customers who would have bought the product even if they haven’t seen the ads.

In the example of bicycles:

• 100 people visited the bike product page
• 90 people saw your retargeting ad
• 10 people buy the bike
• 8 would have bought the bike anyway (without seeing your ad)
• Your ad really only influenced 2 people to purchase the bike
• So, you can’t give the retargeting campaign all the credit for those 10 new customers!
• If the bicycle company pays $100 in a new customer acquisition campaign, it should only be paying around a $20 CPA in a retargeting campaign.

In addition, Google Display and Facebook track view-through conversions, telling you that the user saw the ad, did not click on it, but ended up buying the product later. Ad providers still take credit for these conversions if they take place within a certain time frame.

For these reasons, far too many campaigns I’ve seen have put too much value on customers acquired through retargeting. These customers should have the CPA target set at about 10% of the new customer CPA target, since 90% of the acquisitions measured would have happened anyway. Only 10% can be attributed to the retargeting campaign nudging them to purchase.

The Secret Ingredient: The Holdout Test

So how do you know if your retargeting ads actually motivated the customer to buy your products? The gold standard to determine whether your retargeting ads are influencing customers to buy is to run a holdout test. Take half of your target audience to serve the retargeting ads to, and take the other half and don’t serve them the ads, or serve them a Public Service Announcement. Then see how many more conversions one group is getting over the other.

Your retargeting groups can be based on demographics, geography, or contextual factors. In order to get a good grasp on how much lift the retargeting campaign gives you, you’ll need to track a large number of purchases. For example, you should have purchases in at least the low hundreds in each bucket you’re testing.

In different experiments I’ve run (as well as other marketing consultants I’ve asked), the lift ranges from 4% to 15% with retargeting ads over the group that did not see ads. We’ve never seen significantly more lift than that, and that’s why should discount the value of customer acquisition from retargeting.

Measuring Your Retargeting Campaign

Of course, because ad providers want you to buy advertising and make those ads better, they don’t always make it easy to not run ads. Google and Facebook do provide the tools to run this kind of test, but typically you need to have your account rep set them up on the platform’s back end.

Conducting a holdout test is a sophisticated way to advertise. It requires careful segmentation and tracking of who added to their cart, who received a retargeted ad (or not), and who purchased. Finally, how much did each customer cost you?

I would love to hear your feedback on running retargeting campaigns. How have you set the CPA? Have you measured the lift without a holdout test? Contact EM Marketing if you’d like to determine the right amount you should be paying for your retargeting conversions.