Reaching your goals of maximising profit in AdWords
Having recently renewed my Google AdWords certification, I definitely have AdWords on the brain as of late. And in studying for the exams that are required to renew an AdWords certification, my mind is now swimming with all the delightful metrics AdWords uses to measure success. There are dozens of different metrics you can use to determine how effective your AdWords campaign has been in achieving your business goals. And with over a decade in small business ownership, I can say that the number one goal I’d like to see in any business investment I make (whether that investment is online advertising, new software or the kind of toilet paper we stock in our bathrooms) is the return I get on that investment. In other words:
- Did this investment help me turn a profit?
- Am I doing everything I can to maximize profit?
Whether we’re maximising profit or not is something we can only determine once we have data to analyse, or actual results. There are two AdWords metrics that can help to determine if you’re maximising profit. The first is value-per-conversion. Value-per-conversion is the amount of expected profit (or value) you gain from each conversion. When you can calculate your value-per-conversion for a specific service or product it becomes a very useful goal to define the maximum amount you’re willing to spend on each conversion before it starts becoming unprofitable. The second is cost-per-acquisition (CPA) targets. A CPA target is usually a number below your value-per-conversion. There are a lot of factors that can go into CPA calculation: are you looking for short term value or longer term value? Do you want to factor in lifetime value of a customer? What about word of mouth value?
At the end of the day, it’s easy to pick a CPA target that will be profitable (one where the profit of a conversion is greater than the CPA expense), but it may not maximise profit. Maximising profit can be tricky! You’re basically looking for the optimal balance of profit for each sale and overall sales volume. A lower CPC bid can result in a higher expected profit and/or a higher overall sales volume. There’s a great illustration of that here by Google Chief Economist Hal Varian in the Google AdWords Bidding Tutorial.
You can also utilise the conversion optimiser which allows you to automate CPC bidding for a desired CPA target. And of course there’s always the method of testing different CPA targets to see which one achieves the optimal balance of profit and sales volume.
There are a few pitfalls to avoid when considering return on investment targets if you’re concerned with maximising profit:
- You can’t set a target percentage of revenue to spend on advertising if you want to maximise profit (ie, “We’ll spend 8% of our revenue on advertising.”)
- You can’t decide before a campaign has run and you have no conversion data what your CPA target should be if you want to maximise profit (ie, “We get $20 profit per conversion, so $5 is a good CPA target.”)
- You can’t base target CPA on other marketing channels if you want to maximise profit (ie, “Our target CPA for search ads should be the same as our target CPA for radio advertising.”)
These might result in profit, but not maximised profit since they don’t take into account changes in sales volume that occur at smaller or bigger target numbers.
The trick is this: Measure the profitability you achieve from a campaign, then try testing a few different targets to see if you can find the target that gets you the highest profit possible!