Beyond ROI, Pursuing Profit

The goal of positive return on investment (ROI) on a paid search engine marketing (SEM) campaign is inherently understood. Only crazies would spend money on something with a negative return. Looking at some CPC prices out there these days, some crazies must be in our midst.

Crazies aside, ROI is this year’s buzzword. As Paul Ryan, Overture’s CTO, reminded us at Search Engine Strategies and Safa Rashtchy’s Search Symposium last week, the highest ROI is rarely a profit-maximizing strategy. Ryan is a computer scientist with an MBA, so I’m not surprised to hear him preaching profit maximization/optimization.

I’ve resisted covering this in ClickZ because the concepts go beyond SEM, into the realm of business and marketing best practices. Yet the more clients I talk with, the more I realize success metrics and strategies used for search are sometimes arbitrary. Worse, they may not be aligned with non-search marketing strategy and objectives. Admittedly, execution of search campaign optimization can be complex and daunting. As a marketer, your responsibility is to use metrics and objectives that drive profit. The marketing and profit objectives you select should be consistent across media, online and off-.

Warning: This can hurt your brain! MBAs have semesters of schooling to absorb the concepts underlying this analysis (it’s been over 10 years since I first absorbed them at Yale). Luckily, I liked economics and use these concepts every day in my business and for clients. My objective is to explain and illustrate marginal profit and elasticity. If I confuse you, please let me know.

High ROI campaigns and ROI maximization sound wonderful. You know you can’t really achieve volume maximizing ROI, as you run lots of listings in multiple engines. The highest ROI campaign possible would be having your best-converting listing at a minimum price (CPC). The cost per order/lead/action for that listing is the lowest you can go in the search marketplace: ROI maximized.

Let’s assume for that very best listing, you spend $25 per month and drive $3,000 in sales at a 50 percent profit. Don’t start celebrating yet. Where’s the conversion volume? There isn’t any. You need more traffic. You’re willing to accept lower ROI on broader, higher volume.

Balance ROI optimization and profit maximization. Imagine you have the perfect balance between traffic volume and ROI. You get high conversion volume (sales/leads/actions) and positive profit. On a listing-by-listing basis, you’re lowering per-unit profit in exchange for additional click-through/sales volume that delivers a total profit increase.

Raise your media price (CPC or CPM) too high on a particular listing, given a particular conversion rate, you’ll get negative profit. Drop it too low and you might have made more total gross profit with the additional sales/leads/actions you missed out on (“opportunity cost”). Economists would recommend you continue to spend more on traffic until the incremental (marginal) profit you earn spending more drops to zero. That’s a theoretical solution. The real world is rarely that simple.

Without complex marketing automation systems, a manageable way to move to a profit-maximizing campaign management strategy is to know cost per order/lead/action across all marketing media, as well as where that target needs to be to make a reasonable profit.

Start by setting a specific goal cost per order/cost per action (CPO/CPA) for a campaign (or individually by listing, if listings result in different products being purchased or a different profile of the purchaser). Manage campaign listings around that CPO/CPA goal. You’ll see almost immediately which listings deliver conversion at a rate close to your CPO/CPA, simultaneously driving a high volume of conversions and traffic.

Your campaign management is probably based on some post-click conversion cost objective (automatically or hands on). Based on your CPO/CPA objectives, some of your listings will tend to oscillate in positions or prices close to the premium/heavily syndicated levels. For some listings, a small price increase may result in large volume changes. This presents a profit-maximization opportunity. For example:

  1. Your campaign (or group of listings) maximum CPO is set to $45.

  2. Your top volume listing delivers orders at $44.88, very close to your max.
  3. That listing’s position tends to be 4-6 on average, not heavily syndicated.
  4. You get 40 orders per week at that target CPO.
  5. Net profit per sale (after subtracting the roughly $45 CPO) is $40.
  6. Total profit is 40 x $40 ($1,600).

If you were to raise the target CPO for that listing to $50, based on your conversion you could likely raise your average position a couple of notches. Traffic would increase significantly to 90 orders a week, with a new profit per sale of $35 and a total profit of $3,150 on that listing. Spending rises, but so does profit.

But wait. You don’t have just one listing, your have lots of them, in many engines, plus other media opportunities. Assuming you have all the information you need to make decisions (killer analytics) and an ability to execute campaign changes smoothly and efficiently (not too much time and money spent on processes and analysis), you can profit-maximize your entire campaign at once, raising and lowering CPO targets to find the best tradeoff between volume and profit.

Deciding where to put every additional (marginal) marketing dollar involves looking for the best deal all the time. Know what’s working best and at what price. Essentially, you’re doing an efficiency and tradeoff analysis not only between listings and engines (comparing them to each other) but also across media types.

When you want to cut your budget, cut the least efficient media placement (the one with the lowest ROI). Similarly, when you want to increase profitable revenues with more marketing, select listings with the highest ROI (preferably, where the ROI drop is not large when you raise the CPC or position).

No one has perfect information about all their media buys at the most granular level. The Internet and some direct marketing media allow you to execute a media allocation method where you can:

  • Reduce spending on the least efficient element when trimming the budget

  • Add dollars to the most efficient media vehicle to get the biggest bang per buck
  • Generate a media spending analysis based on overall profit
  • Take all actions based on the marginal changes in profit (going to the highest ROI campaign elements first when seeking volume plus efficiency)

Finding the “right ROI” and the “profit-maximizing campaign” is where the fun begins. Convergence has a new meaning: marketing, business, accounting, technology, and economics meet to optimize profit.

You may not have the tools and technologies to facilitate marketing automation and campaign effectiveness across, as well as within, media. In the meantime, you can use these concepts. Implement a combination of analytics and automation to maximize profit, at least within your search campaigns.

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