Scale Ad Campaigns Faster: Learn the Game-Changing Power of Poker Math
Because many unknown and changing variables affect digital advertising campaigns, performance advertisers are best suited to use probabilistic decision-making frameworks. One of these is Expected Value, commonly used by poker players to determine the long-term profitability of certain hands. Before diving into the application for digital advertising, it’s important to understand four key concepts.
A Heuristic Approach
A heuristic approach is a problem-solving strategy relying on practical, rule-of-thumb methods rather than exhaustive analysis or formal algorithms. It's a way of simplifying complex decision-making processes by using shortcuts, mental models, or practical guidelines to reach "good enough" solutions for the current context. Heuristics are particularly useful when faced with uncertainty, time constraints, or incomplete information, allowing individuals to make reasonably informed decisions without considering every possible alternative or outcome. While heuristics may not always guarantee optimal solutions, they offer practical and efficient ways to navigate complex problems and reach satisfactory results in real-world scenarios.
The Power of Probabilistic Decision-Making
Probabilistic decision-making involves assessing and weighing the probabilities of different outcomes to make informed choices. Instead of relying on deterministic methods or absolute certainty, this approach acknowledges the inherent uncertainty in complex systems and situations. By considering the likelihood of various scenarios and their potential consequences, advertisers can navigate uncertainties and optimize their decisions to maximize desired outcomes. Probabilistic decision-making involves balancing risk and reward, using probability theory to inform strategic choices and achieve better outcomes in an uncertain environment.
Expected Value
Expected Value, often denoted as EV, is a fundamental concept in probability theory and decision theory that quantifies the average outcome of a random variable over repeated trials. It represents the weighted average of all possible outcomes, where each outcome is multiplied by its probability of occurrence and then summed together. In simple terms, Expected Value provides a way to assess the potential gains or losses associated with a decision by considering both the likelihood of each possible outcome and its corresponding value. It serves as a powerful tool for decision-making in various fields, including economics, finance, statistics, and gaming, helping individuals and organizations make rational choices based on probabilities and potential outcomes.
Poker Math
Poker players employ expected value (EV) as a foundational concept in their decision-making process, serving as a guiding principle in determining the profitability of different actions during a game. By calculating the expected value of various plays, such as calling, raising, or folding, players can assess the potential gains or losses associated with each decision based on the probability of different outcomes. For example, a player may weigh the expected value of calling a bet against the likelihood of improving their hand on the next card and the potential payoff if they do. By consistently making decisions with positive expected value, skilled poker players increase their chances of long-term success and profitability at the table.
Applying Expected Value to Advertising
Example: An advertiser contemplating whether to iterate on existing ad creatives or develop entirely new concepts for a social media campaign. The goal? To enhance critical metrics such as hook rate, ad click-through rate (CTR), and landing page conversion rate, ultimately boosting return on ad spend (ROAS).
The Decision Dilemma
Suppose the current campaign advertising creative yields a ROAS of 1.5x ( $1,500 in revenue from a $1,000 ad spend). The advertiser believes that if they improve ad creative they can increase ROAS to 2x, resulting in $2,000 in revenue.
Calculating Expected Value
To evaluate their options, the advertiser assesses the potential outcomes of both strategies. Iterating on existing creatives offers a 50% chance of increasing revenue by $500 while launching a new concept presents a 10% chance of a $3,000 revenue boost.
Iterate on existing ads: 50% x $500 = $250 increase in revenue
Launch a new concept: 10% X $3,000 = $300 increase in revenue
Comparing Strategies
By calculating the Expected Value for each option—multiplying the probability of success by the potential revenue gain—the advertiser gains insights into the comparative merits of each decision. Despite the higher potential payoff of the new concept, its lower probability renders its Expected Value comparable to that of iterating on existing creatives.
Leveraging Expected Value
Digital advertising is a dynamic and challenging environment where success hinges on the ability to adapt and make informed decisions amidst uncertainty. The utilization of probabilistic decision-making frameworks, such as Expected Value, offers a powerful toolset for performance advertisers to navigate the complexities of campaign optimization. By embracing a heuristic approach, advertisers can streamline decision-making processes and achieve satisfactory outcomes in real-world scenarios, even in the face of incomplete information or time constraints. Furthermore, the parallels drawn between advertising strategy and poker highlight the strategic calculations inherent in both domains, emphasizing the importance of weighing probabilities and potential payoffs. Ultimately, by leveraging the game-changing power of poker math, advertisers can scale their ad campaigns faster, optimize their ROI, and stay ahead in the competitive landscape of digital advertising.
