How do you make clicks profitable, and how do you multiply profits? So simple to say, but so incredibly hard to do. Or is it?
When it comes to the performance of your budget for Google AdWords campaigns, there are endless theories, strategies, and philosophies published and religiously followed. Many of these (like click funnels) are logical explanations of what happened in the past, but damaging to act on. (A separate blog post on why click funnel is the friend of the consultant and the enemy of the advertiser is coming soon.)
There are some factors that have a lot of impact and many factors that simply don’t make a difference. One of the things that can potentially be a game changer for you is overlooked by close to 100% of the new clients we meet. That one thing is Cost per Value optimization (Value may be revenues, gross margin, profit, or whatever else you choose to track with the Value variable). Clients may know the revenues resulting from the ad spend (If you don’t, time to wake up and smell the coffee!) but have no means of acting on it to make it better.
Here is an example using CPA (cost per acquisition):
A travel site is measuring the success of their campaign by CPA.
- Their target is EUR 50 per conversion.
- The prices of their products vary from EUR 50 to EUR 11,000 (from discount airline tickets to complete travel packages).
With their target at EUR 50 per conversion, every sale is worth EUR 50 to them. See the problem?
- When they sell a EUR 50 product, they lose money.
- On the flip side, they are most likely not bidding enough to get impressions for the keywords driving sales for the EUR 11,000 product.
By setting a fixed CPA target when you have a huge variance in prices on your site, you will, by default, favor selling more of the non-profitable products. In this example, the travel site is willing to pay 100% of their revenues to sell the low-end product with these likely results:
- They are very competitive for the low-end products.
- They do not get access to the traffic that buys the high priced items.
Unless you are tracking correctly within AdWords or Analytics, you most likely don’t know that this is happening. Your performance may look OK, but one part of the campaign may be subsidizing the other. Imagine what would happen if you take the poorly performing budget and apply it to the part of the campaign that is performing well? A real game change!
How do you act on the above? By tracking Value. You can use Value to calculate how much you are willing to pay per click, and you can re-allocate your budget to the performing part of the campaign. We call this Cost per Value (CPV).
Here is an example using CPV (cost per value):
The Travel site above has a 1% conversion rate on their site, so they are willing to pay EUR 0.50 per click to stay inside a EUR 50 target using the CPA model. Now let's see what happens if they move to a CPV model and are willing to pay 10% of sales for each conversion.
- For the low-end EUR 50 product, their cost for conversion goes down to EUR 5 (instead of EUR 50).
- The EUR 50 product gets a Max cost per click (CPC) of EUR 0.01.
- (With the CPA model, the Max CPC was EUR 0.50.)
- For the EUR 11,000 product, they are now willing to pay EUR 1100 for their high-end product (instead of only EUR 50).
- The EUR 11,000 product gets a Max CPC of EUR 11.
- (With the CPA model, the Max CPC was EUR 0.50, just like the lower end product.)
They are staying inside their cost target of 10% of the sale, and they are able to bid far more aggressively on the higher priced items.
What is the outcome? Increased profitability and increased revenues.
Take it one step further and leverage match type data into the equation, and you will most likely find that an Exact match click will convert 3-10 times more than a Broad match click. Maybe the max CPC for an Exact match click for the EUR 11,000 product will now have a max CPC between EUR 33 and EUR 110.
Additionally, in Travel as in most other highly competitive verticals online, the affiliate channel is driving a large percentage of the transaction volume. Affiliates usually do not have the ability to track Value and are paid on click-out or per conversion basis, making the competitive landscape and bid setting evolve around CPA. Imagine if you can re-write the rules and start acting on hard revenue data behind your bidding vs. flying half blind?
The above is a great example of why you want to optimize for Value if you can track revenues, gross margins, or profit from your Google AdWords campaigns. Doing this manually is not practical since you want to split out for match types, day of the week, or other variables that impact performance. The fact that keywords may drive both sales of EUR 50 products and EUR 11,000 products complicates things but is an even bigger argument for using a bidding engine like Finch for Google AdWords campaigns.
Want a game change for your AdWords performance? Do something that will have a big impact, and stop worrying about assisted clicks and other theoretically logical but challenging to act on strategies :)