Does your company have ultra-low CPC’s or maybe recently smashed a conversion record but didn’t see any benefit to your bottom line? All too often we hear from frustrated marketing managers that despite exceptional Google Ads metrics, they’re not seeing any positive impact to business growth and Google ads profit.
Optimizing for vanity PPC metrics that provide little tangible benefit to the company can be sending the wrong signals. Strong click through rates and conversion metrics are great to see — but even with a target ROAS strategy, your paid ad campaigns might be headed down a profitless rabbit hole.
The number one goal of your Google Ads campaigns should always be to drive business growth, not impressions, clicks or even conversions.
This blog post outlines two basic profit models to optimize your campaigns for profit. They’re applicable to all businesses across all industries, despite the endless variables that can make optimizing for profit difficult.
When creating a profit model for your business, it’s best to not get bogged down with your company’s intricate factors that may influence sales. Even if it’s not an exact science, you’ll still create a process that will prioritize conversions that drive the greatest value to your business. (If you need a quick math refresher, take a look at our handy marketing math guide.)
Let’s take a look at a visual representation of maximizing profit without maximizing ROI. In the graph below, notice that profit is at its highest when ROI and volume intersect. This is due to the additional costs incurred from increasing volume/output.
This model forms the core of all the formulas we look at. It’s pretty basic and provides a basis to adapt to each unique business model/industry.
Unit economics consists of the direct ad revenues and costs associated with a particular business model expressed on a per unit basis.
((All Conversion Value) * (Profit Margin %)) – Cost = Profit
Here, we’re adapting our core model to incorporate the total lifetime value of a customer. This model highlights the full value of each specific conversion by accounting for the return rate of your customers:
((All Conversion Value) * (Profit Margin %) * (Customer Lifetime Value)) – Cost = Profit
Let’s take things a step further and adapt these models to some common business models. Remember, we’re looking to optimize campaigns for profit.
A) Ecommerce Store
((All Conversion Value * Profit Margin %)) – Cost = Profit
While this model primarily uses the formula at its most basic level, some clients stumble on finding the Profit Margin %. Admittedly, if your site offers thousands of products with widely differing profit margins, finding the profit margin may not seem simple. The objective here is to try and find an acceptable average which can be applied to all. Or, if it’s easier, group products into categories and find an acceptable rate for each grouping then apply this model on a categorical level.
Let’s look at an example. John’s Aerodynamic Underwear Shop receives $15,000 in sales from AdWords in a given month from an ad spend of $2,500. After accounting for cost of goods and so forth, he determines he makes a 30% profit margin on each pair of underwear sold.
($15,000 * .3) – 2,500 = X
4,500 – 2,500 = $2,000
Monthly Profit from AdWords = $2,000
B) Lead Generation
((Conversion Leads) * (Average Lead Close Rate) * (Average Value per Close) * (Profit Margin)) – Cost = Profit
Lead generation typically proves to be the most complicated business model to apply the profit model to, but it’s actually where we’ve seen the greatest success. It’s easy to drive false positives with leads, which is why we recommend keeping a close eye on conversion tracking, and an even closer feedback loop with your sales team to ensure a focus on highly qualified leads. Once this is established, the profit model will help steer your AdWords efforts to maximize results.
Let’s look at an example: McTalk is a global enterprise telecom company providing IT services to large, multinational companies. They use AdWords to target CIO’s and other high ranking execs looking to modernize their IT infrastructure. CPC’s in this market are incredibly high with an average monthly ad spend of 10K driving just 75 leads.
However, the average contract is worth 500K with a 50% profit margin. Due to the scale of these projects, only 1% of these leads meet the requirements to become actual customers.
((75 * .01) * (500,000 * .5)) – 10,000 = Profit
(.75 * 250,000) – 10,000 = Profit
187,500 – 10,000 = $177,500
Monthly Profit from AdWords = $177,500
((Conversions) * (Avg Price) * (Duration) * (Profit Margin %)) – Cost = Profit
Let’s look at an example: Ultimate Spinners sells subscriptions to receive monthly fidget spinner gift boxes at $19.99 per month. They earn $5 profit (25% of $19.99) on each subscription each month.
On an average month, they receive 134 new subscriptions from an ad spend of $1,500. They have observed that most customers cancel their subscription after 5 months.
((134 * $19.99) * (5 * .25)) – $1,500 = Profit
($2678.66 * 1.25) – $1,500 = Profit
$3348.33 – $1,500 = $1,848
Monthly Profit from AdWords = $1,848
Determining which aspects of your campaign are truly driving profit is the first step. But where do you go from here? We recommend building these models into your Google Ads platform so you can have the most up to date data readily available while you’re making your regular account optimizations. Learn how to build custom columns here.
The ultimate bottom line: Optimize holistically, not granularly and adopt a growth mindset. Growth should be your top priority with efficiency second.