- Posted on 9 June 2015
Bid Optimisations: Time To Leave The ROI Approach Behind
The Importance Of Bid Optimisations
Finding your optimal bids matters. Bidding too aggressively on a keyword or product can exhaust precious budget very quickly and not deliver expected returns. Being too conservative on profitable queries will make you miss opportunities to generate additional business. With competition on the digital landscape on the rise success is more and more determined by bidding and budget allocation. The price to pay for suboptimal bidding strategies is no longer affordable.
The Key Performance Objective
For most businesses running performance marketing campaigns, the key goal is profit. Maximising the level of profit generated for the business through online channels by delivering new customers as well as increased transactions from the existing ones. Depending on the organisation and the complexity of the business, measuring profit can be more or less straight forward. But regardless of the complexity of the cost structure of a business, one objective seems very clear in most cases: maximising gross margin, i.e. revenue from performance marketing activities minus all variable costs.
The Problem With ROI: Example
To illustrate the limitations of the ROI approach let’s look at the following Google Shopping example with two products:
Products 1 & 2 have the same level of CPC and the same avg. order value. However, these products have different conversion rates (CR). While 1 is returning a conversion for every 12.5 clicks, 2 only needs on average 10 clicks to achieve a sale. As a result, product 1 shows poorer CPA and ROI than product 2. A £20,000 budget split equally between both products would provide the following results:
With the £10k investment we can buy 4k clicks on product 1 and generate £64k revenue. The same investment buys the same number of clicks on product 2, but with the higher CR this budget returns more conversions and a higher £80k revenue figure. Based on these numbers it seems very clear that the budget allocation between both products is not optimal. Or is it?
What we haven’t considered so far is the cost of each product for the retailer. For both manufacturers and distributors, the sale price is not necessarily an accurate measure of the value of each sale.
In this example, taking manufacturing costs into account reveals that every printer sale is 1.5 times more valuable for the business than those of office chairs. Product 1 returns a margin of £150 per unit sold versus just £100 for product 2. Looking at revenue and ROI earlier we concluded that if we had to choose between investing in PPC for printers or investing in office chairs, the latter were the smart choice. But are they?!
Actually, our initial conclusion was wrong, printers have a 20% higher margin after PPC costs than office chairs. Revenue and ROI were misleading in this example. If we had to choose between allocating a £10k budget to one or the other the most profitable option for the business is product 1.
Customer Life Time Value
Margins are not the only issue with the ROI approach. Businesses facing increasing new customer acquisition costs will put great effort into retaining those customers for as long as possible. Although winning customers’ loyalty is no easy task, there are powerful tools and strategies that can boost retention and customer life time value. In this context, any new customer acquisition investment must be assessed fairly factoring in the quantity and quality of new business. A link must be established between investing in new business acquisition now and the value those new customers will deliver for the business later, in order to make the right decisions. ROI, as it is commonly used by digital marketers today, entirely disregards any future return from current investment.
From CPA To ROI To… Click Value!
With improvement in tracking technology and the availability of data, the industry has moved from a transaction oriented approach (CPA-based optimisations) to focusing on revenue. ROI-based optimisations have allowed us to maximise revenue within a given budget. For some advertisers, this strategy will indeed provide optimal results. But for many others, product margins and customer life time value are key considerations that simply cannot be ignored.
It is time for digital professionals and advertisers to work closer together. A new metric is needed. And its calculation requires a combination of business intelligence and tracking data. We know with certainty what each click costs. It is time we figure out how much each click is truly worth and optimise our bids on that basis. It is time to move to Click Value.