February 19, 2018
As digital marketers, many of us are used to being multilingual when it comes to communicating KPIs to clients. Some clients are interested in efficiency metrics, like ROAS, CPA, or Ad/Cost. Others prefer more growth-oriented metrics, and aim to maximize revenue or leads within a given budget. In the vast majority of cases, though, all these metrics serve as proxies for the metric that nearly all business value most: profit. In today’s blog post, we’ll explore the benefits of reporting on profit, and discuss how a profit-based management approach can unlock growth opportunities in your accounts.
How To Calculate Profit For PPC
Most simply, profit is the measured by summing revenue and subtracting cost. For e-commerce clients, profit can be calculated thusly:
All conversion value x profit margin – (total ppc cost)
So, for example, let’s say I’m running an advertising campaign for Wow! Widgets (a leading producer of widgets in Walla Walla, Washington) and I want to report to them the profit of their PPC campaigns in the aggregate for the month. Across all channels, we produced $ 10,000 in conversion value, and the client communicated a 30% profit margin to us. The total cost of our ppc campaigns was $ 600. So, how much profit did our PPC campaigns produce?
$ 10000 (total revenue) x .3 (profit margin) – $ 600 (total cost) = $ 2400 (profit)
Nice! You can also apply this basic formula to lead generation campaigns by factoring in close rate. Let’s say that Wow! Widgets also sells widget consulting services, for which they have a close rate of 25% and charge a flat rate of $ 5,000. The client let us know that they have a 50% profit margin on their consulting services. Let’s pretend we produced 12 leads against a cost of $ 2,000 this month. What was the client’s profit?
12 (leads) x $ 5,000 (revenue per lead) x .25 (close rate) x .5 (profit margin) – $ 2,000 (total cost) = $ 5,500 (profit)
Looks like we can report another profitable month for Wow! Widgets. Our contact, Wally “Widget” Wilkerson will be much pleased.
The Benefits Of Profit-Based Management
At this point, you might be thinking to yourself, “Sure, these word-problems are a lot of fun, and I enjoy thinking about widgets as much as the next person, but what’s the point?” Fair question. The truth is, reframing your management of PPC campaigns to account for profit can lead to a number of insights and benefits. Those benefits include:
Better Alignment With Your Clients’ Goals And Better Understanding Of The Value Of PPC
As mentioned above, no matter what KPIs you report, chances are that your clients’ are ultimately most interested in generating an increased profit. Thus, if you haven’t had a conversation with your clients regarding their profit margin, there’s a good chance there’s a possible disconnect between the results you’re communicating and what the client really cares about.
It also puts in stark relief the value of PPC to the client. When calculating cost for the client, be sure you’re including your management fee (whether it be a percentage of spend or a flat rate) so you can say with confidence how much value is really being added to their business. If you’re calculating profit as an in-house PPC manager, simply include the total value of company resources that were dedicated to PPC (salaries, free office snacks consumed by digital marketers, etc.) to the cost column.
The Ability To Make Smarter Budget Decisions And Optimizations
Astute readers will note that, directionally, profit-based measurements will tell us the same thing as efficiency metrics like ROAS when profit margin is consistent. Campaigns that produce the greatest profit/cost will have the greatest ROAS. Take a look at the following example:
Here, calculating profit doesn’t really tell us anything new in terms of our budgeting. Whether we base our decision off ROAS or Profit, we’re likely to reallocate budget towards our Widget A campaign.
In most cases, though, profit margin is not consistent across all products or services. Let’s take a look at these widget campaigns again, but assume that different widget types have different profit margins.
Now we see that calculating profit leads us to different conclusions than we would have arrived at if we were to make decisions solely based on the ROAS of different campaigns. Widget A does not produce a profit even though it has the highest raw ROAS. In this case, it would be most profitable to reallocate budget to the campaigns for Widgets B and Widgets C.
This, of course, is a pretty simplified example, but there are many other opportunities for optimizations you might miss if you aren’t thinking in terms of a variable profit margin. For example, calculating the profit generated per click of your keywords could lead to different bidding decisions than you would have otherwise made. For more on that subject, check out this PPC Hero post, “Profit Per Keyword…Beats Cost Per Acquisition Every Time”. Fair warning: the post is from 2012, so it assumes you’ll be doing your calculations with an abacus, but other than that its recommendations are gold.
Ultimately, most businesses are concerned with generating profit. As digital marketers, the more we can communicate our results and make decisions according to profit, the more we’ll be aligned with our clients’ goals.
Have questions? Or stories to share about how profit-based reporting and management changed your approach for an account? Reach out on twitter @ppchero!