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Optimizing for Profit

The profit optimization model has the objective of maximizing the overall profit that comes from the Ad spend. The assumptions for this model is:

Each product has varying sales prices and profit margins, and the advertiser wants to maximize the overall profit from the ad spend.

Optimizing for profit is the holy grail of online advertising. It is the only model where you have all the information (product cost, revenues, profit, AdWords cost, etc.) which means you can predict the outcome of the next click before you set the bid for how much you are willing to pay. This outcome is Profit, and as long as your profit increases you are willing to fund the ad spend.

Here is an example:

A company is selling electronics on their web site and their objective is to generate as much profit as possible. They must track the margin (or revenues and cost) for each product or transaction (How to capture profit and link it to AdWords cost). In this scenario the advertiser will keep increasing the ad spend as long as the overall profit increases.

Here is the data to determine the Max CPC:

  • Maximize profit : No margin target, it is max $ profit
  • Conversion rate: 5%
  • Profit/margin from last conversion: $100  (resulting from i.e. 3 products in the cart)
  • Max CPC: $5.00

The Max CPC will be set for each keyword based on the profit history, the conversion rate and the historic Cost. The objective for managing a campaign with this method is to maximize the overall profit.

In a portfolio approach, if you have 1 keyword producing profit contribution at 10%, then another keyword may be producing profit at at 30%, both will gain increased Max CPCs, while a keyword with negative profit will get the Max CPC reduced (assuming all other variables are constant). Because the constant changes competitors for the same clicks makes it makes competing for the best clicks auctioned off by Google every time someone enters the search box to look for something exceptionally dynamic by nature.  This requires constant elasticity testing for each keyword to stay inside an optimal range.  Each change is measured by impact on profit, driving the decision making for bid adjustments.

This methodology is effective when you have MANY products with the VARYING margins.


Optimizing for Revenue

Revenue optimization has the objective of maximizing the Revenues that comes from the Ad spend.  The assumptions for this model to be effective is:

Each product has the same profit margin

Here is an example:

A company is selling electronics on their web site and their objective is to generate as much revenues as possible.  They will either be using Google AdWords conversion tracking (Dynamically tracking the amount of each completed shopping cart with the Value variable) capture the amount from each sale and have that associated with the keyword, ad and ad group that captured the sale (for more info click here).  

The company knows that in average they can spend 20% of their revenues on advertising (leaving 80% of the sale to cover product costs, order processing, overhead, etc.).  Here is the data to determine the most you can pay for the next click (Max CPC):

Target cost of Revenues: 20%

Last sale recorded for given keyword: $300

Conversion rate: 5%

Max CPC: $3.00

The Max CPC will be set for each keyword based on the revenue history, the conversion rate and the historic cost.  The objective for this way of managing a campaign is to maximize the revenues as long as the cost of revenues is 20% in average.

It is important to distinguish that the max CPC is set per keyword (ideally for each match type of the keyword, with bid modifiers for Device and Remarketing for Search profile) based on the keyword’s cost/revenue history, and not based on the price of the product the keyword matches.  The reason for this is that once the keyword triggers the ad to display and the potential buyer clicks on it, once on the site the potential buyer may or may not purchase the matching product.  He or she may buy something totally different or purchase a number of products.  The only hard data you can optimize from is the cost, the revenues, and the conversion rate.

In a portfolio approach, if you have 1 keyword producing conversions at 10% cost of revenues, then another keyword will be allowed to produce conversions at 30% (assuming the revenue produced by the two keywords are the same, and because they usually are different it creates a complexity that is only practical to solve with automation software) .  The average of 20% is what matters to maximize the outcome under this methodology.  This is easy to illustrate through branded terms.  The branded terms (your own company name, url, etc.) usually produces revenues in the low single digit percentage cost because you likely have a quality score of 10 (ad rank impact) and a very high relative conversion rate.  That leaves a surplus (relative to the 10% cost of revenue target) that can be used to grow your revenues, market share and customer base for non-branded terms and still stay below your cost target.  Alternatively, if you isolate the branded terms to enjoy the high profit those produce, the non-branded terms may all be above 10% cost of revenues and the result is that you leave all that business for your competitors to have.

This methodology is effective when you have MANY products with the SAME margins.

One problem with this model for an eCommerce company is when products have varying profit margins and prices.  In theory you can successfully optimize a campaign for Revenues, but while the revenues may grow - the profit may turn negative in a worst case scenario.  The solution to this challenge is presented in the next blog in this series.


Optimizing AdWords for business value - Conversions for eCommerce companies

This is the 2nd post in our series on Conversion Types. Choosing the right conversion type for your business is vital to generate and optimize the value that is returned through your AdWords budget. You can read the first post here.

Historically, CPA (cost per acquisition) is the most common conversion type among businesses in many industries. This model best serves advertisers that are optimizing for conversions that have a fixed value. These conversions could include completing a web form, viewing a key page, phone call, completing a shopping cart, etc. The most important factor to consider when choosing the CPA model is whether each conversion has the exact same value.

The assumptions for this model is:

Every conversion is worth the same, including;

Cost per Conversion

Value per Conversion

CPA is effective for businesses that generate leads which are followed up with offline to buy only one product, at a fixed margin. This approach may also be effective for eCommerce companies that sell only one product at a fixed margin.

However, if your company does not match one of the two profiles above, your AdWords account could be running very inefficiently. If your business offers more than one product at a fixed margin, you may be limiting your ability to compete effectively and damaging the bottom line.

Here is an example:

A company selling electronics on their site with an objective to generate as many sales as possible may have looked at historical performance and learned that the average sale is $100. They can spend 20% of the revenues on advertising, leading to a $20 CPA target. With the $20 CPA target, the Max CPC is calculated in this way:

Target Cost per Acquisition (CPA): $20

Conversion rate: 5%

Max CPC: $1.00

This is the basic approach employed by most companies. The Max CPC will be set for each keyword based on the conversion rate. The primary objective for this approach to managing a campaign is to maximize the number of conversions while maintaining an average cost per conversion/acquisition of $20.

Further, a company could employ a portfolio approach, where a group of keywords could generate an average CPA of $10, while other keywords are allowed to go up to $30 CPA. The overall average of $20 is what matters to maximize the outcome under this approach.

As a reminder, this methodology is effective when you have ONE type of conversions (one product to sell, one web form to fill out, etc.).

If there is variability in the value of a conversion (revenue or profit, for instance), then CPA may not be the right model for your business. For an eCommerce companies that offer many different products, each with different margins, the CPA approach does not take into consideration the total Revenues or Profit being produced by each keyword.  

If the purpose is to generate revenues or profit, you must capture and use that data when deciding how much a click is worth. The magic in optimization is knowing the outcome before you buy the click; without historical data (revenue/profit) there is zero probability that you will make the right choice when deciding how much to pay for the next click to maximize your business value.  Choosing the right conversion type to optimize from becomes infinitely critical for your success.

-Bjorn

Next: the next post will cover how to optimize for revenues, followed up by a post on when to use profit.

Conversions—optimizing AdWords for business value

Conversions have long been, and will continue to be, your scorecard for success as an advertiser on AdWords. The value you gain from a conversion can be measured in many ways: new customers, transactions, revenues and/or profit. Accumulating and measuring conversions isn’t the secret to growing your performance. Leveraging the conversion data, specifically optimizing your account based on the value of your conversions, is the key to long-term growth and success.

At the foundation of your optimization efforts is identifying the ultimate outcome (i.e., transactions, revenue, profit, etc.) you want out of your account, measuring the value of that outcome, and using the data to continually and consistently grow your performance.  For instance, if you want to grow profit, measuring and using the number of new customers (CPA model) may drive you in the opposite direction of more profit.

Over the next few posts I will examine the most common goals for online advertisers and discuss pros and cons for each of them. There is an optimal model for most companies, but my experience is that over 90% of all the online advertisers we talk with want one thing (revenue and profit) but they do not use a scorecard and/or optimization model centered on that outcome.

Knowing what a conversion is worth before you buy the click is foundational to successful advertising execution. This series will define the worth of various conversions and how to execute to maximize that worth. These are samples of conversions:

  1. Completed shopping cart (transaction)

  2. Fill out and submit web form (lead)

  3. View of key page (i.e. online demo)

  4. Download document (i.e. white paper)

  5. Phone call (Call Extension)

  6. Any other action on your site that can be measured

This is easy enough and straight forward for savvy online marketers. If this was all there is to it, we could just put a $ figure to each of these actions based on the value they add to our business and be done with it. For example, every sale on my website is worth $25 to my company because the average sale is $100 and we have on average 25% margins on what we sell. Now assume you have a 3% conversion rate on your site and you can spend $0.75 per click for a given keyword.

In reality this is far more complex. If you have 10,000 products, each with different prices and margins. Now, your average checkout has 2.7 products in the cart. Is each sale worth the same? What about adjusting for mobile clicks, how about return visitors?  Is an exact match worth more than a broad match visitor? Herein lies maybe the biggest waste of all online marketing budgets, and more importantly, the biggest opportunity for the progressive advertiser to outcompete everyone else in their industry.

In my 15 years in eCommerce, with the last 5 in the paid search (PPC), I have seen the full spectrum of models to grow sales and drive profits. As I write this in November 2014 on the eve of the holiday season kicking into gear, most companies are using the same measurement of success today as they did 10 years ago. Additional complexity has been added, such as analyzing attribution relationships. But if the added complexity does not have a relationship to the ultimate outcome (profit), then it’s simply added complexity without benefit and cannot be leveraged for growth. Back then very limited data was available compared to being able to track almost anything today: the number of conversions they can generate at a set cost per conversion (CPA) is the measurement of success and means of executing their AdWords programs.

When everyone does this it creates an incredible inefficiency when competing for the most profitable clicks you can buy from Google. What if there was a much better way? What if you knew exactly what the next click from Google would give you in return (revenue and profit)?  Would that change how you run your AdWords program?

In this series I will cover how to do this for a variety of business models, from businesses generating leads to profit optimization for large eCommerce sites.  I will cover these models and the scenarios they are best fitted for:

Conversion optimization: Cost per Acquisition (CPA)

Revenue optimization: Cost per Value (CPV)

Profit optimization: Total profit objective


Growing Revenue through your Keyword Bank - Looking at Revenue by Keyword Origin

A proven method to grow your AdWords revenue is by systematically expanding keyword coverage. While that may seem obvious, most businesses continue to struggle to achieve consistent revenue growth and a strategy for improving your keyword coverage is a great place to start turning it around.

To demonstrate the impact complete keyword coverage can have on your account, I want to share results from a client we have been working with. I will take the revenue generated in the last 28 days and look at the keyword origin, giving us a better picture of how revenue has been influenced by keyword management. 

This client has generated $202,000 over the last 28 days, but let’s take a look at that figure by keyword origin. Over time, we have expanded the keyword bank for this client, adding new keywords from a couple of different sources. When you look at the revenue from a keyword origin perspective you can better understand how to continue to grow your account.

There are 5 different keyword origins that we will look at: Standard, Manual, Keyword Feed, Dynamic Search Term Insertion (DSTI), and Shopping DSTI. 

Standard

The largest revenue contributor are the keywords in the Standard category. Standard origin keywords are the keywords that existed in the account when we began management. We are continually optimizing these keywords, but they were already a part of the account prior to management. These keywords generated $126,00 in total revenue. Nearly ⅔ of the total revenue is in this account; which is not uncommon for accounts that have been running for quite some time.

This account was already a mature account that was performing well prior to our management efforts. This explains the large portion of revenue contribution for this category.

Manual

Keywords that are added by the client directly after Finch has begun management fall into the category we call Manual. These keywords can be added for a variety of reasons, but they represent a gradual increase in coverage by the client. This category contributed a total of $7,000 of revenue in the last 28 days.

Keyword Feed

Finch has developed an XML feed we call the Keyword Feed that connects the client’s inventory and product catalog directly to AdWords. With this feed a client always has accurate and complete keyword coverage for all of the products they sell online. This keyword feed generated an additional $10,000 of revenue for the client.

Dynamic Search Term Insertion (DSTI)

The next largest revenue contributor is a category we call Dynamic Search Term Insertion (DSTI). DSTI dynamically adds the search terms that lead to purchases as Exact Match keywords in your AdWords account. Instering keywords in this way increases your keyword coverage and lowers your actual cost-per-click (CPC) for future customers.DSTI keywords generated $56k in total revenue for this client.

Shopping DSTI

Lastly, Shopping DSTI takes the search terms that triggers your PLAs and inserts them as Exact Match keywords in your account. This ensures that both your PLAs and text ads are being displayed for the search terms that have led to purchases in the past. For this client, Shopping DSTI has generated $7k in revenue.

If you look at the results, between the keywords that existed prior to management and the new keywords manually added by the client, AdWords has generated a total of $133,000 in revenue. But when you add the revenue generated through DSTI, Keyword Feed and Shopping DSTI revenue is increased by an additional $68k. A total increase of 33% of new revenue.

As you can see, ensuring complete keyword coverage and continually growing the keywords in your account can increase your revenue.

It's important to note that these changes happened over a period of time, continually increasing revenue by adding the right keywords at the right time. Depending on the state of your account, and the changes made over time, the share of revenue generated through the various keyword origins will also shift. Over time you will see DSTI and Shopping DSTI continuing to take a growing portion of the revenue generated, while you may see a decline in the revenue generated through Standard keywords.

Want to see what we can do for you? Start with a free Audit. We will take a look at your historical performance and give you specific suggestions on how you can increase your revenue.

- Brad

 

Gear up AdWords for the holiday buying season

Fall is in full-swing—apple cider, pumpkins and pumpkin lattes! As we head into the holiday buying season, we know you are busy putting the final touches on your marketing plans for this all important last quarter of the year. Beating out your competition and winning more of your customers will bring you increased revenue and profit. We want to help you make this your best holiday season ever!

As your prepare to polish your AdWords plans, allow us to suggest a couple of areas that will help you turn AdWords into a profit-generating machine!

Google Shopping Campaigns

Google just made the migration final just a month ago. While it doesn’t change the experience for end users, the new Shopping Campaigns give you more tools to drive performance using data. PLAs have long been an excellent channel for retailers to win more customers. We recently published a new eBook that explores the differences with the new Google Shopping Campaigns and the strategies you need to take advantage of them.

Complete Keyword Coverage

Keyword Coverage is often an overlooked and undermanaged portion of every AdWords account. Your keyword bank represents your market opportunity and an incomplete account is leaving revenue and profit on the table for your competitors. The more complete your keyword bank is, the more you are able to compete effectively!

There are 2 ways you can ensure you have complete keyword coverage: connecting to your product catalog and inserting search terms that convert. Connecting your product catalog to AdWords ensures that you have an accurate representation of all the products you carry right inside of AdWords. This XML connection directly to AdWords makes it easy to maximize your market opportunity. Inserting search terms that converts, through Dynamic Search Term Insertion, ensures you are continually growing your keyword bank with terms that generate revenue and profit. In addition to expanding your market opportunity, DSTI will also improve performance lower your costs by inserting the keywords as [Exact Match] keywords.

Bidding for Profit or Revenue, not clicks

Each keyword contributes to revenue and profit differently. Actually, each match type for every keyword contributes differently. When you start looking at your account in terms of profit and revenue, you begin to see how you can do this differently to generate more of what you actually want. Armed with the profit and revenue data for individual keywords, you can begin setting the bids to maximize your revenue and profit, rather than simply setting bids based on the average generated by a larger group of keywords. This concept is the very heart of competing on AdWords and turning your all of your PPC efforts into a profit machine. 

We have outlined this strategy in an ebook title: Buying Profit by the Click, download your own copy.

Remarketing for Search

Remarketing for search has been out for a little over a year, but has been a great success, for those that have implemented it at least! Effectively target your return customers by increasing your bids based on how they have interacted with you previously. If a Search user has visited your site previously, perhaps their click is worth more and you adjust the bid by 20%; if they have viewed several product pages, maybe they are worth a bid that is 50% higher; if they have something currently in the cart on your site a bid of 100% higher is justified; and so on. When you combine this capability with very granular bid you have a killer strategy.

Ad Extensions

Trick out your ads with all of the features Google provides. This will increase your AdRank and give you additional real estate on the SERP page, increasing your chances of winning the click. There are many Ad Extensions and features that you can enable on your account. In many cases having Ad Extensions enabled can improve your AdRank, increasing your chances of winning a click.

Start with an Audit

Want to see how prepared you are for this holiday season? Run a free AdWords audit. We will take a detailed look at your historical performance and give you specific suggestions on ways to improve and grow your revenue and profit this year!

 

- Brad

 

Profit-driven Marketing

Matt Lawson, Director of Marketing, Performance Ads, at Google writes about Profit-driven Marketing as a new trend in a post title: The Profit-Driven Marketer: Setting a New Standard for Performance.

Lawson writes, “At the highest level, profit-driven marketing means moving digital marketing from a cost center to a profit center and extracting as much profit as possible out of your marketing spend.” (emphasis added.

At Finch we’ve been offering profit-driven marketing for years using our Total Profit option. eCommerce businesses that put profit-first are seeing dramatic results as they start optimizing their ad spend to maximize their profits rather than conversions.

What if you could do profit-driving marketing with very little effort?

It's actually rather simple with Finch. Here’s what it takes:

  1. Use Google Analytics for conversion tracking
  2. Enable GA eCommerce Tracking; add the product line items and categories with the transaction
  3. Upload the cost of your products and/or categories into Finch’s system.

Using this data, Finch continually optimizes your AdWords account to earn more profit with every bid.

You can read more about this process in our eBook, Buying Profit by the Click. If you want to get specific about how Finch can do this for you, get started with a free AdWords audit and we will demonstrate how your account can be optimized for more profit, transforming your ad budget into profit-driver!

-Jason

New Ad Extension: Callouts - Increase your CTR, and your sales

Google has been testing a new ad extension named Callouts and is now publicly available for AdWords advertisers. We have had several customers trying this new extension out during the beta phase, but in the next few weeks Google will be making it available to all AdWords advertisers.

What are Callouts?

For a long time, advertisers have understood the power of special offers to increase conversion rates. Callouts is a new extension that makes it easy to highlight special offers and unique selling points within any of your Search ads.

We have recommended that including offers like this is a best-practice in Sitelinks as a way to effectively increase conversions. Callouts serve the same purpose, but do not include links to your site. Google has suggested that you use Callouts to highlight unique selling points about your business (i.e., Free shipping, award winning service, etc.) and important products details and benefits. Your ads can include up to four callouts with up to 25 characters, but pithy Callouts perform the best.

Callouts are additive, so you can include them with other ad formats, like Sitelinks. You can create, schedule and manage Callouts within the Ad Extensions tab at the account or campaign level, and even down to the Ad Group level.

Callouts are awesome!

Whenever you enable ad extensions it improves the performance of the ad by giving you more real estate, more relevance to your customers and now gives them specific reasons to click through on your ad. As you enable ad extensions you click-through-rate (CTR) will increase, lifting the overall performance of your account.

Here are a few specifics on using Callouts:

 

  • Provide offers and highlight unique selling points.
  • Enabled extensions impact your AdRank, enabling Callouts can lift your AdRank, leading to higher ad positions.
  • Target mobile with device-specific customizations.
  • You can edit Callouts across your Account, Campaigns and Ad Groups without having to edit each ad.
  • You can schedule Callouts to display on specific dates, days of the week and time-of-day.

 

Things you need to know about Callouts:

In addition to the key features and benefits of Callouts, there are a few things you need to keep in mind as you begin enabling Callouts in your account.

 

  • You are not allowed to duplicate text in Callouts across the Account, Campaign or Ad Group. For instance, you can’t put Free shipping on the Campaign and again on the Ad Group. Some similar terms will be considered duplicate (i.e., Customer service and Customer support)
  • Google will generally show the highest performing and most useful combinations of extensions and formats. This takes some of the guesswork out for you in determining which combinations will give you the greatest CTR.
  • No Dynamic Keyword Insertion. This is a bit of a bummer, but hopefully we will get this in future releases.
  • No gimmicky text or emoticons in your Callout text
  • Keep them short and pithy. Google recommends 12-15 characters, even though they allow up to 25 characters.
  • Use sentence case for your callouts. i.e., Free shipping not Free Shipping.

 

Finch Customers, we’ve got you covered

We love new features from Google, especially features that help you increase your CTR, which drives your Quality Score and AdRank, enabling you sell more through AdWords.

As Finch customers we’ve got you covered and will be enabling the features as they become available on your account. If you’re not yet a customer, this is yet another example in the ways Google continues to evolve and how Finch will always help you be in the fore-front. You should start with a free AdWords audit to see the other ways in which Finch can help you generate more profit and revenue through AdWords.

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