The Ultimate Guide to Google Ads Audiences: Observation vs Targeting & Layering Strategy (2024)

In the early days of Google Ads (then AdWords), keywords were everything. If someone typed "buy running shoes", they were a potential customer. Period.

In 2024, keywords are not enough.

Why? Context.

The person searching for "CRM software" could be:

1. A college student researching a term paper (Zero value).
2. A junior marketer looking for a free tool (Low value).
3. A CTO at a Fortune 500 company looking to migrate their enterprise system (High value).

The keyword is identical ("CRM software"). The value is drastically different.

If you are treating all these searchers equally, you are wasting 50% of your budget.

This is where Google Ads Audiences come in. They allow you to layer who the person is on top of what they are searching for.

This guide is the definitive "Mega-Authority" manual on mastering Google Ads Audiences. We will cover the critical difference between Observation and Targeting, how to build "Custom Segments" that steal your competitors' traffic, and the "Audience Layering" strategy that we use to reduce CPA by 30% for our clients.

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Part 1: The Golden Rule (Observation vs. Targeting)

Before we touch a single strategy, you must understand one setting. Getting this wrong is the #1 reason we see campaigns flatline during our audits.

When you add an audience to a campaign, Google asks you to choose: Targeting or Observation.

1. Targeting (The "Strict Filter")

Definition: This setting restricts your ads. Your ads will only show to users who match your keywords AND are in the audience list.

• Formula: Keywords + Audience = Impression.
• The Risk: If you select "Targeting" for a standard Search campaign, you will likely cut off 90% of your impressions. You are telling Google: "Do not show my ad to anyone unless they are on this specific list."
• Use Case:
  • RLSA (Remarketing Lists for Search Ads): When you only want to bid on generic keywords (e.g., "shoes") for people who have already visited your site.
  • Display / Video Campaigns: Where you must define the audience because there is no search intent.

2. Observation (The "Data Overlay")

Definition: This setting does not restrict your ads. Your ads still show to anyone searching for your keywords. However, Google will report performance data separately for the audiences you added.

• Formula: Keywords = Impression (Audience data is just tracked).
• The Power: You can see perfectly clearly that "In-Market for Software" users convert at 10%, while valid "Unknown" users convert at 2%.
• The Strategy: Once you have this data, you apply Bid Adjustments. You tell Google: "I'm willing to pay +50% more for a click if the user is in this high-converting audience."

Strategy Note: For 99% of Search Campaigns, the correct setting is Observation. Never use "Targeting" unless you have a very specific reason to restrict reach.

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Part 2: The "Audience Interaction" Hierarchy

Not all audiences are created equal. Google categorizes users based on their intent and relationship to your business. We organize them into a hierarchy of value.

Tier 1: First-Party Data (Your Data)

These are users who have already interacted with your business. They are your highest value assets.

1. Customer Match Lists: You upload a CSV of email addresses, phone numbers, or mailing addresses. Google matches these against logged-in users.
   • Pro Tip: Upload a list of your "High LTV" customers separately from your newsletter subscribers to create higher quality Lookalikes.
2. Website Visitors (Remarketing): Users who visited specific pages but didn't convert.
   • Segmentation: Create lists for "Visited Pricing Page", "Added to Cart", and "Blog Readers".
3. YouTube Viewers: Users who watched your videos. This is an underutilized goldmine for Brand Awareness retargeting.

Tier 2: Custom Segments (The "Competitor Hack")

Formerly "Custom Intent", these are powerful audiences you build yourself based on user behavior across Google properties.

The "Competitor URL" Strategy: This is our favorite tactic. You can create a Custom Segment of people who browsed websites similar to specific URLs.

• Action: Enter the URLs of your top 5 competitors.
• Result: Google targets users who have likely visited those competitor sites or viewed content highly relevant to them. It effectively allows you to "conquest" competitor traffic without bidding on their expensive brand keywords.

The "Search Term" Strategy: Target people who have searched for specific terms on Google (but haven't necessarily clicked your ad).

• Action: Enter keywords like "best [industry] software", "[competitor] alternatives".

Tier 3: In-Market & Life Events (Google's Data)

Google's algorithm identifies users who are actively researching products or services.

• In-Market: "Active intent" buyers. E.g., "In-Market for CRM Solutions," "In-Market for Residential Properties."
• Life Events: Users hitting major milestones. E.g., "Moving Soon," "Just Married," "Starting a Business."
  • B2B Application: Targeting "Starting a Business" is incredible for selling incorporation services, web hosting, or business banking.

Tier 4: Affinity & Detailed Demographics (Broad Reach)

These are broader categories based on lifestyle and long-term interests.

• Affinity: "Technophiles," "Luxury Travelers," "Avid Investors."
• Demographics: "Homeowners vs. Renters," "Parents of Toddlers," "College Grads."

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Part 3: The "Audience Layering" Execution Plan

Here is the exact framework we use for every new client account. We call it "The 360 View." We don't guess which audiences work; we add everything on Observation mode and let the data decide.

Step 1: The "Kitchen Sink" Setup

When launching a new Search Campaign, go to the Audiences tab and add at least 20-30 distinct audiences as Observation.

Include:

• 5-10 In-Market Categories: Relevant to your product (and tangential ones). Selling office chairs? Add "In-Market for Office Furniture" AND "In-Market for Business Services."
• All Eligible Remarketing Lists: All Visitors (540 Days), Cart Abandoners, Leads.
• Detailed Demographics: Homeownership status, Education, Employment Industry (if available).
• 3-5 Affinity Audiences: Broad interests that align with your buyer persona (e.g., "Business Professionals").

Step 2: The Data Gathering Phase

Let the campaign run for 3-4 weeks. Do not touch the audiences yet. You need statistical significance.

Step 3: The Analysis & Optimization

After 30 days, review the data. You will potential see patterns like:

• Insight: "People in the 'In-Market for Real Estate' audience have a $50 CPA, while the campaign average is $100."

• Action: Apply a +25% Bid Adjustment. Tell Google to bid more aggressively for these users.

• Insight: "People in the 'Job Seekers' affinity audience have a high CTR but zero conversions."

• Action: Exclude this audience. Add it as a Negative Audience to save budget.

• Insight: "Role: Likely 'C-Level Executive' (Demographic) has a 3x ROAS."

• Action: Duplicate the campaign into a standalone "Alpha" campaign targeted only at C-Level Executives to scale budget without waste.

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Part 4: Advanced Strategy - The "Bid-Only" RLSA (Remarketing Lists for Search Ads)

RLSA is often misunderstood. It's not just for "chasing" people. It's for economics.

The Scenario: You sell expensive Enterprise SaaS. Bidding on the keyword "database software" is suicide—it's too broad and costs $50/click.

The Solution:

1. Run cheap Display/Video ads or top-of-funnel Content campaigns to drive traffic to your blog.
2. Create a "All Website Visitors" audience.
3. Create a Search Campaign for the broad keyword "database software".
4. Set the Audience to Targeting (Strict) for "All Website Visitors".

The Result: You are now bidding on the broad, high-volume keyword "database software", BUT your ad only shows to people who already know your brand.

• They are qualified.
• They have brand affinity.
• The conversion rate will be 2-3x higher.
• You can afford the $50 click because the math works.

This strategies unlocks high-volume "short tail" keywords that would otherwise be unprofitable.

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Part 5: Customer Match & The "Privacy Sandbox" Future

With third-party cookies dying (and Safari/iOS already blocking them), First-Party Data is your lifeboat.

Customer Match allows you to upload offline data to Google.

• Match Rate: Google matches usually 40-60% of your email list to signed-in Google users.
• Usage:
  • Exclusions: Exclude current customers from "User Acquisition" campaigns to stop wasting money.
  • Upsell: Target current customers with "New Feature" announcements on YouTube/Discovery.
  • Similar Segments: Google's AI looks at your "Best Customers" list and finds new users with similar search patterns.

Warning: You need a good history history of compliance and spend to unlock Customer Match features. Ensure your privacy policy explicitly states you use data for advertising.

Summary Checklist

1. Check Settings: Ensure all Search campaigns use Observation (not Targeting) unless it's a specific RLSA campaign.
2. Populate Observation: Add 20+ relevant audiences to every campaign regardless of initial intent. Data is free; use it.
3. Leverage First-Party Data: Upload your customer lists and use them for exclusions (at minimum) and Similar Segments.
4. Build Custom Segments: Create an audience of people browsing your competitors' URLs.
5. Review Monthly: Check audience performance reports and apply bid modifiers (+/-) to steer the budget toward winners.

Audiences turn "Search" from a keyword match game into a person-based marketing strategy. Stop bidding on strings of text. Start bidding on people.