How to get the most profit out of your PPC campaigns – avoid these 3 common mistakes

After finishing the article, you will be equipped with new thoughts and insights that you can put to work on your own campaign, in order to create that one thing that all marketers should strive for after all: PROFIT.

Take a look at the statistics from 3 examples below and decide in each scenario which campaign is performing the best?

ROI
Campaign A: ROI 10%
Campaign B: ROI 20%
Campaign C: ROI 50 %

ROAS
Campaign A: ROAS 200%
Campaign B: ROAS 350%
Campaign C: ROAS 500%

CPA
Campaign A: CPA 25€
Campaign B: CPA 75€
Campaign C: CPA 200€

If you think you know the top performer of each of the 3 scenarios above, I must disappoint you and inform you that evaluating a campaign performance based on the criteria is not possible.

By simply looking at those top-line statistics you don’t know whether a campaign is meeting the targets, is profitable or actually losing money.

ROI – don’t be mislead.

ROI (%) = (Gain from investment – Cost of investment) / Cost of investment x 100

While ROI serves as as a quick way to find out whether you are making or losing money, it does not tell you the magnitude of profits that a campaign generated to a business. If positive you know you are making money, if negative you know you are losing money, other than that it does not indicate much.

If your sole goal is to reach a high ROI you are getting the false incentive to spend as little as possible.

See the example below: If your expenses are 1,000 € to acquire 3,000 € in revenue or 200 € in actual business profit your ROI is 20% (Campaign A). If your expenses are 4,000 € to acquire 11,500 € in revenue or 600€ in business profit your ROI is 15% (Campaign C).

A marketing manager aiming to deliver strong ROI numbers would focus on generating cheap conversions, and not chase down additional conversions at a higher cost per acquisition.

ROAS – revenue does not equal profit.

Commonly used formula:
ROAS = Revenue from campaign / Cost of Campaign credit

Google’s definition of ROAS:
“Let’s say you’re measuring sales for your online women’s shoe store and you want to optimize your bids based on the value of a shopping cart total. Your goal is $5 worth of sales (this is your conversion value) for each $1 you spend on ads. You’d set a target ROAS of 500% – for every $1 you spend on ads, you’d like to get 5 times that in revenue.

Here’s the math:
$5 in sales ÷ $1 in ad spend x 100% = 500% target ROAS
Then, AdWords will automatically set your max. CPC bids to maximize your conversion value, while trying to reach your target ROAS of 500%.”

By naming the term ROAS, which stands for Return on Ad spend, Google in many cases misleads people into thinking that a ROAS value above 100% automatically means that a campaign generates money to the business.

Are you actually making money?

We will use Google’s example from above to illustrate this simple principle and say that for every 1 € of advertising spend we generate 5 € in revenue. By itself 500 % of ROAS looks amazing, and surely you would be happy to report such results to your boss or to your client. Let’s dive deeper to see if you are indeed a marketing guru.

A 5 € sale generated with 1 € advertising spend leaves us with 4 €. Now let us assume a healthy gross margin of 40% on the product. This means that by selling an article for 5 € you make 2.00 € gross margin. By subtracting 1 € for advertising and 3 € for cost of goods sold, we are left with 1 € from the original 5 € of revenue.

Lucky you! Still making money right? Not so fast!

As you sold your article online, offering free shipping to your customers, you need to calculate shipping fees on top of your expenses.
Subtract 2.50 € for shipping and handling per order and you are now starting to realize that your epic 500% ROAS campaign is actually losing you 1.50 € on every sale that you generate online.

If this campaign successfully sold 1,000 articles you would be 1,500 € in the red, excluding your time and effort for managing and developing this campaign.

Take away:
Explaining to your boss that you are great at losing him money wouldn’t be much fun. Make sure that you don’t focus on ROAS by itself!

When using ROAS you should always work with conversion value instead of revenue. This value should be the gross margin of the product you are promoting (or an estimate of thereof), never revenue!

Use the ROAS formula that you find below to measure your success. As long as the value will be above 1 you know you are profitable:
ROAS = (Conversion Rate x Average order value) / Cost per click

*Average order value used in the calculation should be the average gross profit of each product that you manage to sell online.

CPA – don’t sacrifice profit for cheaper conversions.

CPA = Total ad spend / Total conversions

CPA by itself is a non-informative value, as it always needs to be seen in contrast to the profit margin and actual profits that a newly acquired customer generates for a business.

Many people are afraid and start panicking or shutting off campaigns, when they see the cost per acquisition rise higher and higher. The cost per acquisition for new customers, whether rising or falling, should always be seen in contrast with the value they deliver. Ultimately, CPA values should always be evaluated on the profit that they deliver to the business.

A mistake that we often notice when discussing goals with current or prospective clients is, that they would like to use one general cost per acquisition value for the entire campaign saying something along the lines of “As long as cost per acquisition stays below 30€ I am happy.”.

While this is a good starting point, we need to make sure that we as marketers and the client understands that each product or service segment has different profit margins for the business.

If we would simply follow the customer’s guidelines we would optimize all campaigns for that customer to reach a max CPA of 30€. This could lead us to miss out on large sums of potential profits for the customer, because we are not able to acquire customers for 40€, 50€ or more.

For a campaign to be effective, the focus should be on meeting the most important business goal there is, creating profit. To show that the campaign with the cheapest CPA is not always the best performer, we have looked at the statistics of advertising dental services for a dentist located in Munich, Germany.

* Profit (Loss) Business level: This calculation includes an attribution of 150 € to each campaign, that is taken from the 450 € monthly campaign management fee from the agency.

Take away: Don’t make the mistake to use average CPA across the account. Each segment or product line has its own profit margin and therefore should have its own maximum CPA that is still delivering profitable sales.

Break down each product or service line into a separate campaign in order to optimize CPAs toward a profitable level. If after 6 months of data you are not reaching your CPA targets you can decide to turn off the campaigns, as they are not making, but rather losing money.

Optimize for profit – your boss & clients will be happy campers

While people can debate the benefits and long-term value of demand creation campaigns, the focus for most businesses is on demand capture campaigns, e.g. more sales & higher profits in the short-term –> 3-6 months.

Many business owners tense up when we ask them about their profit margins across their product or service offering. Understand that we are not asking these questions to steal your secrets and start a new company in your niche. No, we are asking these questions as a partner that aims to bring maximum value to your business. When we understand your business numbers, we are able to evaluate whether we are able to generate a profit for you.

As Jerr Kaup said it: “Profitable marketing is reminding likely-to-buy prospects of the value of your products / services in meeting their needs, over and over, at an acquisition cost lower than your allowable acquisition cost.”

Kotler one of the most known figures in the world of marketing states that marketing is ”the science and art of exploring, creating and delivering value to satisfy the needs of a target market at a profit.”

Online advertising should be used to create money for the business. Therefore, you should optimize the activities towards generating the most profit. Not highest ROI, highest ROAS or lowest CPA.

Take away:
Now that you have made it so far, and are equipped with the new knowledge, take a look at our final example below.

You will be able to see that the campaign that had the lowest ROI, the lowest ROAS and the highest CPA actually produced the most conversions and ultimately the most profit to the business.

Keep in mind that this is not the case in every campaign that you will manage or oversee. However, if you only take one thing from reading this article it should be that you always optimize your campaigns with business profits in mind.

Revenue = Sales Volume in €
COGS = Cost of goods sold
ROI = (Gross Profit – Campaign Expenses) / Campaign Expenses
ROAS Google = Revenue / Ad Spend
ROAS Proper = (Conversion Rate x Average order value) / Cost per Click
CPA = Conversions / Ad Spend