Setting up effective e-commerce PPC campaigns
This article explains the best approach to e-commerce PPC campaigns to maximise your revenue and your chosen bottom-line profit margin.
Whether it’s text or shopping ads, managing pay-per-click (PPC) accounts with little to no consideration of profit margins can be a costly mistake – but one that’s all too common. At Further, our strength is defining, setting up and managing accounts to achieve maximum return on investment (ROI).
Whether you’re experienced in PPC or new to the channel, you may have heard of the metrics cost-per-acquisition (CPA) or return on ad spend (ROAS). Both KPIs are used by PPC managers to optimise bids and budgets, based on factors such as site conversion rate and average order value (AOV). This helps to achieve ‘profitable’ top-line revenue targets but can have a huge impact on performance if not set correctly.
CPA and ROAS themselves are not the problem. The issue arises when CPA and ROAS targets are applied across products with different margins and/or sale prices, or when they are set with no profit margin considered at all.
A key approach for all our retail clients is to discuss their business objectives and agree upon a bottom-line profit margin target and top-line revenue target. We then work with the client to look at the budget available, the product range and associated profit margins.
For example, let’s say a business has a bottom-line target profit margin of 25% and has two groups of products to promote:
- Product A has a £100 retail price but cost £25 to buy/produce (this can include agency costs too).
- Product B has a retail value of £50 and costs £12.50 to buy/produce.
- Product A is £500 and costs £300 to buy/produce.
- Product B has a retail value of £750 and costs £450 to buy/produce.
Based on purchase prices and manufacturing, both our Group 1 products have a 75% profit margin without advertising. Because we know we want to achieve a 25% profit margin target, Product A could spend up to £50 for a sale while Product B could spend £25.
Therefore, we could set a CPA target of £50 for Product A or £25 for Product B. The simpler approach (and the approach we take with e-commerce campaigns) is to set up a ROAS target of 200% for these products and any other products with a 75% profit margin. Based on conversion rate, CPC bids will adjust to achieve our desired ROAS and, more impressively, our profit margin target.
Both products in Group 2 have a 40% profit margin and, based on our 25% target, we know product A could spend up to £75 while product B could spend £112.50. We would set up these products in a campaign with other 40% profit margin products and set a ROAS target of 667%.
The dangers of a global ROAS approach
Let’s consider if we had set up the account with no consideration of profit margins by products, and taken a simplistic global ROAS approach to targets:
Group 1’s ROAS of 200% applied to Group 2
When a ROAS of 200% is applied to our 40% profit margin products, spend per sale increases significantly:
- Product A generates revenue of £500 but costs total £550 (£50 loss or – 10% profit margin).
- Product B generates revenue of £750 but costs total £825 (£75 loss or – 10% profit margin).
It’s evident that setting a ROAS of 200% on our 40% profit margin products (pre-advertising) has a negative impact on ROI, and these products are therefore set up to lose money. It is likely that revenue will increase as our ROAS is set to be more aggressive, but this revenue will not be profitable.
Group 2’s ROAS of 667% applied to Group 1
When a ROAS of 667% is applied to our 25% profit margin products, spend reduces significantly:
- Product A generates revenue of £100, but costs total £40 (£60 profit or a profit margin of 60%).
- Product B generates revenue of £50, but costs total £20 (£30 profit or a profit margin of 60%).
When we apply the 667% ROAS model to our 75% profit margin products (pre-advertising), we see available media spend reduce and profit margin soar. The result here is that we may see very few sales and revenue, as our bids will have been so drastically reduced that our ads are unlikely to show.
It’s clear that a one-size-fits-all approach to ROAS doesn’t work.
The last thing a business wants to do is set a static ROAS target across all paid activity and review performance at the end of the year, only to see optimisation and automated bidding has prioritised lower profit margin products. If this does happen, you lose money on each product sold.
Other considerations for e-commerce PPC campaigns
PPC is very rarely consistent. Due to fluctuations in behaviour you will not get your profit margin campaigns to achieve their set ROAS targets perfectly. Some will surpass target, while others fall behind. You will find that due to the price of certain products (especially low-priced products) and the conversion rates they achieve, CPCs will be low, and your ad rank will fall to a level that means your ads never show.
It is therefore the role of the PPC account manager to oversee products, keywords and budgets – refining ROAS targets to maximise revenue and profit from the account. For example, if one campaign is exceeding its ROAS target while others struggle due to low CPCs and rank, you could decrease ROAS on this campaign knowing you will generate a profit margin of less than 25%, but in the knowledge that your other campaign is achieving, say, 35%. Although this might sound at odds with our formulated approach, the aim here is to retain control across numerous groups of products when a global ROAS would not allow this.
Brand vs remarketing
We treat brand and remarketing campaigns differently as their objectives are slightly different. For brand, we tend to want to retain position one and therefore the campaign has a value beyond our ROAS target. Perhaps there is competitor bidding on the term or you wish to maintain real estate on a highly competitive search engine. You may also know the importance of branded terms as a second touchpoint in the purchase cycle for visitors who initially found you through a non-branded term. Typically brand CPCs are so low and conversion rate so high that they achieve a stronger ROAS than any profit margin-led campaigns.
When remarketing, you would hope for stronger conversion rates and lower CPCs than your standard search or shopping campaigns, and therefore strong ROAS figures and profit margins. If ROAS looks poor for your remarketing campaigns, it might highlight a need for stronger messaging, calls to action and promotion(s) as opposed to benefitting from any inclusion within ROAS targets.
Assisted conversions and attribution models
It’s important to be mindful of the role of paid within the purchase funnel and its strong ability to assist other channels or keywords with conversions. This is where a strong understanding of attribution models comes in.
Most accounts are set to last-click attribution, but a review of attribution models may highlight that paid is pivotal in generating certain sales. Therefore, you may be able to justify an increase in your ROAS targets or simply move away from a last-click attribution model to a model such as linear or first interaction – in turn helping you to optimise your account more effectively.
Using a single ROAS target across all your products or using a ROAS target without proper consideration of profit margin will ultimately lead to inefficient optimisation of bids and budgets (automated or not). The result means spending too much to remain profitable because:
- less profitable products will be prioritised
- certain products not being shown at all due to restrictive targets
- product ads being shown too frequently or at unnecessarily high positions.
As such, we recommend segmenting your products by margin and using a ROAS target for each group to achieve your defined bottom-line margin.
Once this is established, you will be in a much clearer position to optimise effectively and adjust these targets.
If you’re struggling with paid digital, or if you need any other help to get your business to achieve its goals, get in touch with us.
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