The Profit-Driven Marketer: Google finally sets a new standard for performance

“Finally!” was my first thought when I read Google’s Inside AdWords post about “The Profit-Driven Marketer” yesterday.

“Right now, digital marketers are standing at the crossroads between opportunity and challenge. The C-suite wants more accountability for the marketing spend, but at the same time, the multi-channel purchase path is becoming increasingly complicated. A growing cadre of search marketers is responding to this tension by rethinking digital advertising basics such as KPIs, budgets and customer journeys. These search marketers are part of a trend toward what we call “profit-driven marketing.”

The Category Leader’s impression share tracks nicely to demand while the Category Laggard’s results fluctuate wildly, probably due to cyclical budget constraints. (Source: Google)
The Category Leader’s impression share (using Profit-Driven Marketing) tracks nicely to demand while the Category Laggard’s results fluctuate wildly, probably due to cyclical budget constraints. (Source: Google)

“Thanks Google!” was my second thought. What Google calls a “trend” is something we have been doing, loving and telling our customers about since our foundation in 2008: “Profit-Driven Search Marketing”.

The problem is that many advertisers rely on commonly used, widespread optimisation strategies, working with variables such as the return on investment (ROI) or the cost-turnover ratio. But to get the optimal results one has to “ignore traditional efficiency metrics” and focus on the essential KPI – the profit!

Two requirements must be met:

1. Measure beyond the conversion

What Google means by that is that, for profit-driven search marketing to work, you need to measure more than just the click and the conversion! You need to dig deep into data and get margins and cancellation ratios – best on product/keyword level. The following holds: Profit = margin – advertising costs.

2. Bid for profit, not efficiency

This is the essential part. The basic principle is rather easy to understand and can be explained very briefly: “For every single keyword the respective ad has to be placed on the position the estimated profit (after ad spend) is the highest.”

A simple model shows very clearly what I mean:

Table Profit Model
Assumption: one product (price: 100€, margin: 30€) is being advertised. Conversion rate is 3%. Clicks and CPCs are freely chosen but typical for keyword auctions.

If your goal is to maximize revenue you would probably bid for position 1. At the same time, ad spending on position 1 is tremendous, which leads to actual loss!

If you’re still sticking to cost-turnover ratio then position 10 might be your favorite. Unfortunately, revenue and margin are the lowest on that position – although you’re getting 462€ of profit.

If you’re looking for the maximum profit you’d have to bid for position 6! And if so, you should also forget about budget restrictions. As long as you’re break even or making profit, you should invest money. It pays off! Maria Hwang, online marketing manager at Airbnb, puts it in a nutshell:

“We will spend as long as we can make a certain profit. We’re not constrained by budget.”

I want to close with another quote from Google that kind of gives us hope for our mission to force e-commerce companies to rethink traditional metrics and optimisation strategies:

“If you’re willing to empower them (your team or vendor) to pursue profit-driven marketing tactics, you could see big returns that you probably didn’t even know you were missing, as well as additional customers.”

If you’re interested in more info about it and you’re German-speaking, have a look at this post from 2010. Did you ever try profit-driven search marketing?

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Maximilian Hainlein

I'm working for crealytics as Social Media and Marketing Manager since 2011. My motto: "It's better to be the needle than the haystack."

  • Andreas Meyer

    I was always surpised how many companies still believed that maximizing your revenue is everything. Of course, Google was the one who draw profit out of this old-school marketing. Therefore, it is really good to see Google promote profit-driven marketing. It shows that times finally have changed and nobody wants to believe in fairy tales anymore. (Why else should Google suddenly promote something that obviously cuts their profits?)

    Funny, that they use almost the wording of our old slogan: crealytics – Profit Driven Search Marketing 🙂

  • Andreas Meyer

    I just found out that Google even offers a detailed strategic guide for profit-driven marketing that can be downloaded as PDF: