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.