An approximately 10 percent lower return rate can increase profits by up to 5 percent: A third of German online retailers hold this view. This is the result of an IBI Research study at the University of Regensburg. Comprehensive returns management is therefore a key success factor for e-commerce operators and pay-per-click advertising cannot ignore this success factor. In part one of this two-part article I want to discuss the question of why returns are relevant for PPC campaigns. So let’s get it on!
Finding the most profitable placements
Bid management systems automatically distribute a budget in pay-per-click advertising to several campaigns that promote your own product portfolio. Returns should always be involved when seeking to achieve optimization of revenue or profit.
A small example will clarify the relevance of returns for PPC campaigns: Via correct positioning of ads on the search results page a bid management solution should not generate traffic in an undifferentiated manner to the destination site, but should specifically maximize the advertiser’s profit. The following holds: Profit = margin – advertising costs.
A keyword that is to be placed has various basic properties:
Depending on the position and the expected clicks on it, with these parameters bid management can estimate the profitability of a keyword in all positions, and set the bid for the keyword such that it is placed in the most profitable position. In this case, it is position 1. The expected profit at this point is € 875:
However, if potential returns are not included, the assessment will be overly optimistic. Because the occurrence of returns and the associated repayments reduce the margin. In particular, in practice additional costs will arise due to processing returns: Postage and time expenditures, or even a decrease in the value of goods.
If, for example, the returns reduce the expected margin by only 10 percent, the result for the profitability of an ad positioning already presents a very different picture. The most profitable position is now located at No. 4 (see Figure 3). An ad in this position will be clicked more rarely in this example, and it will achieve less sales than the ad in position 1, but the difference between margin and advertising costs ensures that profit is greatest at the fourth position.
I think this example makes it plain to you that returns should be considered in PPC advertising. Tomorrow, we’ll show you how to use them in order to get more profit out of your AdWords campaigns!