Clicks, Customers, and Cashflow, Part Three: Profit
Published: September 22, 2014
Author: David Rothwell
(Part 3 of a 3-part series; read parts 1 and 2.)
We’re passionate about profit.
It may sound obvious, but your business exists to earn profit.
Many AdWords managers obsess over clicks, CTR, Quality Score, Impression Share, Cost per Click, Ad Position, Cost per Acquisition, and so on.
While these are “noble pursuits,” for my clients (and me) they have to take second place to profitability. Once that is achieved, we can work on improving all the other important metrics.
So I only obsess over my client’s profits – or they won’t get paid, and neither will I.
Is AdWords value for money?
Many businesses buy clicks, get leads, or sell stuff to customers but don’t earn any profit as a result.
Worse – they don’t even know it because they aren’t measuring it properly, if at all.
Paying your click costs, and maybe a monthly management fee, without knowing how profitable your campaigns are, doesn’t seem like “value for money” to me.
And when I was losing clients because they couldn’t tell if I was “value for money”, I introduced what I considered to be a much fairer, commission-based model that made my value directly linked to their profit – but only for those clients who qualify.
No profit? No more excuses.
In previous posts, (hyperlink to those posts on the bold text) we’ve shown you how to set up transaction-specific conversion tracking, and offline conversion import, so now there are no more excuses not to know how much you spend on clicks, and how much customers pay you as a result, unless:
-users block or clean cookies (there’s nothing any advertiser can do about that, so we have to write those off)
-the sales cycle is longer than 90 days (the maximum duration of an AdWords cookie)
-you have a complicated sales process with many parts that cannot all be joined up and reconnected to the ad cookie or gclid (Google Click ID)
I look at this as a “profit supply chain” – the chain between the click, how much it costs you, how many clicks you have to buy to get a customer, the event which tells you that you got paid, how much, and how much profit you made.
Supply chain management
So the most important thing you can do in your business is to –
-keep this supply chain as short as possible
-ensure all the links in the supply chain are connected up
-measure the performance between every link in the chain so you can improve it
This is why the success of AdWords campaigns is about more than just clicks, and why managers and Agencies need to understand and be invested in the whole sales cycle.
Why your business is unique
Every business on the face of the planet is unique – even if you are selling the same stuff, bidding on the same keywords, and writing the same ad copy (except for the url).
This is because your business is made up of many parts, including:
-cost per click
-average order value
-keyword quality score
-overheads and fixed costs
-discounts on volume supply
-email follow up marketing system
-how much profit you need to earn
So, although there are common best practices, there’s never any such thing as a magic bullet, or a one-size-fits-all solution to AdWords marketing – it has to be carefully integrated into your website, business processes, and economics.
Businesses with “concrete” websites and sales processes (i.e. they can’t or won’t change them) or fixed budgets should not consider using this system to run AdWords campaigns.
Show me the money!
Does it work for everyone?
No! Sometimes the economics and competitive marketplace make AdWords too costly.
Even if you had the Perfect Campaign:
-Ad position 1.0
-100% Impression Share
-100% Conversion Rate
It’s still possible you could not earn a profit because of all the other variables in your business.
Consultants know the answers, just not your questions
This is why, in my Consulting practice, AdWords is just a part of what we explore.
For example, when Google introduced charges for free Shopping Results links driven out of Merchant Center, many businesses could no longer afford these clicks.
Today, some Search campaign clicks are so expensive for cheap, commodity items, that (for the moment, until the media costs rise as is inevitable) only the recent Google Shopping campaigns with cheaper clicks are affordable and profitable.
Not all conversions are equal
For sales, you want to count all conversions so you can see when customers buy more than once. Many merchants only sell a single item from an ad conversion, so they have to be profitable unless more sales come in regularly afterward from the same customers with no more click spend (e.g. email marketing).
For lead generation, you only want to count unique conversions, or you could be counting multiple leads from the same visitor.
Conversion repeat rate
For merchants, it can be very revealing to see that customers buy multiple items – I’ve seen visitors search and arrive for something the merchant doesn’t even sell (oops, more negatives needed – or maybe not?) and still find something to buy.
For Google Shopping campaigns, some agencies advocate against bidding on low value, or low margin products.
But, this can be misguided, since a visitor may buy a higher-value product during their stay – I’ve seen it happen, so you need to keep an open mind and watch your conversions.
You can’t predict what people will buy, so if you have an opportunity to bring them to your site for a low-cost click, you should test it to see if sales result.
It’s possible – and advisable – to manage Google shopping campaigns (even with tens of thousands of SKUs) to individual product ID level, and bid for them on a profit center basis.
Customer lifetime value
“In marketing, customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or user lifetime value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer” – Wikipedia
For AdWords clicks
Customer Lifetime Value =
(online conversion value + imported offline conversion value) * conversion repeat rate
If you sell repeatedly to the same customer – say, a subscription – find the average quantity of these per customer and multiply by the average value.
If you don’t know your customer lifetime value, it’s usually not a good idea to be buying AdWords clicks.
Breaking even – fast
You want to break even on your advertising cost as quickly as possible – then everything you can do to improve and optimise your campaigns, ad groups, keywords, match types, ad copy, negative keywords, ad extensions, web pages, call tracking and sales processes will bring increasing profits.
Since most businesses aren’t selling a single product or service, and margins probably vary across them, start with averages to begin with. You can always change them later and run individual campaigns per product or service with different financial targets.
The following calculations only take account of ad spend, not your other fixed costs and cost of goods.
CPA – Cost per Acquisition, or Cost per Sale
Knowing your CPA and managing your campaigns by it is a good starting point.
If your average order value, or customer lifetime value, was $100.00, you could spend $100.00 to acquire the sale or lead and break even. Anything under $100.00 = profit.
As mentioned previously, if the sales process takes longer than 90 days, or your funnel is too complicated to connect all the steps, you will be unable to attribute your ad spend or manage your CPA correctly.
If that’s the case, consider taking an interim payment or deposit and using that for your CPA.
But CPA management takes no account of sales revenue, so I no longer use it to manage campaigns, although sometimes it’s a useful indicator.
ROAS – Return on Ad Spend
By tracking transaction-specific conversions, and importing offline conversion data for either phone call orders or from leads which have converted into sales within 90 days, we can see exactly what’s happening with our profitability.
Google defines Return on Ad Spend (also called ROI or Return on Investment) as:
Total conversion value / total click cost
It’s important to include both online and offline conversions, and ensure you’re not multiple-counting from more than one conversion source (e.g. analytics).
An ROAS of 1.0 = break-even, where what we spent on ad clicks, we got back in sales revenue. As mentioned, we want to hit that as soon as we can.
As you can see in the following screenshot (Google Shopping), different products behave very differently in terms of ROAS, even with similar CPA.
Return on Ad Spend (ROAS) can differ dramatically across products
Automation is your friend
With sufficient volume, combined with Ad rotation set to Optimise for Conversions, I’ve found the Flexible Bidding Strategies (Target CPA, Target Return on Ad Spend) to be effective in managing bids automatically, providing there’s no seasonality.
Many advertisers distruar automation offered by Google, and anecdotal experience shows that Google employees are often misinformed and/or misguided in their advice. They don’t know your business, and never will – but you do.
However, when you have your profitability clearly defined and under control, AdWords automation can be a powerful ally to save time and money, and I use it as often as I can.
Automated bidding is usually available after 15 conversions in 30 days or fewer – but I like to see a lot more for reliability and only use flexible bidding strategies for campaigns with at least 5 conversions per day, consistently.
Don’t forget that every day of the week is different, and in a 30-day period there are usually only 4 Mondays (etc.) for Google to compare performance across to make predictions.
Keep in mind that what you bid, along with other factors like Quality Score, Ad rank, and so on, will govern several critical factors, like:
-which ad extensions show
So be careful of trying to increase your ROAS by bidding lower, because the less you spend on conversions, the fewer of them you are likely to get due to decreased ad positions and visibility, reducing your sales revenue.
It is not a myth that lower ad positions can perform better for profitability. They can, as this segmentation (top vs. other) screenshot shows:
ROAS is indeed higher with lower ad positions, but the CTR is 13x lower, with far lower sales and revenue.
Pay Google more – not less
Your goal could be:
-accelerated ad delivery with an unlimited daily budget
-a minimum acceptable ROAS to support your profits
-maximum Impression Share for rank and budget
-claiming the highest ad positions to show as many ad extensions as possible
-taking your customer off the market so they don’t buy elsewhere
-spending as much as you can to run your profit center
Maxing out your business
Once I had developed a system to achieve consistently profitable results for clients, I began to look for any constraints I could remove to max out their campaign performance, as well as web page conversion increases and sales process improvements.
Remember, searches on Google (ad impressions) are not infinite, and it’s quite possible to buy as many of them as there are and not be able to get more.
Providing you’re profitable, that’s exactly what you want.
Sometimes prospective clients ask me if I do Bing, Facebook, and other ad channels.
My reply is always, “Have you maxed out AdWords yet with unlimited daily budgets? If not, why not?”
I usually find AdWords keeps me plenty busy, and Google are always changing things – for example, last week they just rolled out Callout extensions, which means I’ve got to go re-engineer every ad …
Fire your customers (the bad ones)
These days (it wasn’t always so) I prefer only to work with clients who don’t want to limit their own earnings, or mine. Strangely, for some clients, that’s too much like hard work …
For Merchants, as long as they don’t run out of stock, they simply want to sell their entire inventory for as long as people will buy it, so usually they won’t stop taking orders.
For lead generation, there may well be a limit to how many customers you can take on at an acceptable quality of service level.
If you get to the happy position of having to turn customers away because you’re maxed out, consider replacing tedious or more expensive clients with better, nicer, more higher-paying ones.
Stop selling my stuff
I support other Agencies world-wide, and I remember consulting with a really nice lady who wanted help introducing more automation so she could scale her operation – exactly what I like to do.
She described how she was handling the marketing for a client providing distance-learning products, and how he would regularly tell her to pause the campaigns because he couldn’t take any more phone calls.
I was appalled. “So your client is stopping himself, and you, from earning more money?!”
There was little point in even looking at the AdWords campaigns.
I told her she needed to help him re-engineer his sales process away from the bottlenecks he had (usually that’s not going to happen; it’s what I like to call “a lifestyle decision”), or find clients that automation could actually help with.
The Theory of Constraints
“The theory of constraints (TOC) is a management paradigm that views any manageable system as being limited in achieving more of its goals by a very small number of constraints. There is always at least one constraint, and TOC uses a focusing process to identify the constraint and restructure the rest of the organization around it.” – Wikipedia
To eliminate a constraint, you have focus on it, remove it, or minimise it.
If your computer has a hard drive, that’s the constraint, since it is the slowest thing in your device by orders of magnitude.
Over time, hard drive costs have become greatly reduced. It’s still difficult to get rid of them altogether, but some machines remove this constraint by using solid state devices instead.
To minimise this constraint, disk manufacturers have focused on:
-denser storage capacity
-higher disk revolution speeds
-faster disk-head seeking times
-disk optimisation algorithms
What’s stopping you from earning more profit?
Jacob: I find that everyone has a number and it’s usually an exact number, so what is yours?
Wall Street: Money Never Sleeps
To get more Clicks
-structure your account with maximum campaigns for greater granularity and control
-increase your impressions with more keywords and/or match types
-increase your clicks and CTR with more and better ads and ad extensions
-increase your bids and budgets to a minimum acceptable ROAS
-use more campaign types, networks, and devices as appropriate
To get more Customers
-track conversions in AdWords
-know your customer lifetime value
-offer more products and services
-increase your conversion rates and sales
-test and optimise landing pages and checkout processes
-track everything your visitors do (analytics, third-party tools like Crazy Egg)
-encourage them to ask questions (site search, live chat, forms, phone calls, etc.) and compile these and your answers into a knowledge base you can make self-service on your site (record phone calls and get them transcribed at speechpad.com)
To get more Cashflow
-ensure all steps in the sales funnel are connected back to the originating click
-use online, offline import, and transaction-specific conversion tracking
-eliminate wasted impressions and clicks with negative keywords
-start looking at the constraints on your earnings
-shorten your sales funnel “supply chain”
-introduce new products and services
-increase your capacity or inventory
-streamline your sales processes
-reduce your overheads
-raise your prices
So, now when people say to you: “AdWords? We tried it; it doesn’t work”, they will wonder why you’re smiling to yourself…
“AdWords Marketing that Pays –
Why There’s No More Excuses”
Coming Summer 2014 to Amazon Kindle
Reserve your free, full copy with unlimited updates now at