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Altering Your AdWords Account Structure To Increase Your Long Term Profitability

Jamie Hallitt

by Jamie Hallitt on 8th January 2014

Pay Per Click ComputerFor many business owners, making a steady profit is the main focus when it comes to paid search campaigns, but it can always be improved upon. Be it with more profitable investments or cutting the costs of current ones to increase the margin.

There are lots of different ways to structure an AdWords account, but if your main goal is to make a return on investment, it is important to ensure that you are investing the right amount of your budget into the most profitable keywords, whilst also improving the performance of the less profitable ones. Getting this structure right is a key factor when trying to improve your ROI.

Achieving Short Term Profit

I’m a strong believer that paid search can work very well for time-constrained marketing campaigns and promotions, as it enables advertisers to present their target audience with exactly what they’re looking for very quickly. It can often take less than a day to get a small campaign up and running, with an advert at the top of the search engine results pages (SERPs) within 24 hours of creation.

Using eCommerce campaigns as an example, we can look at how short term profit through Google PPC is achieved using a very simple formula, just with the data columns available in AdWords:

Value per conversion – Cost per conversion = Profit per conversion.

If you’re looking at the above stats at campaign level, you will see how much profit each campaign has generated over your selected time period. However, because this is all based on averages across potentially thousands of keywords and ads, it becomes difficult to further optimise a campaign without drilling into every single keyword to assess its true profitability, and near enough impossible to identify the profitability of advertising for each product that’s being sold via keywords.

Using Effective KPIs

It’s important to recognise short term success, particularly as it usually means some sort of progress is being made. Increasing CTRs, lowering bounce rates and increasing Conversion Rates are all signs of an improving PPC campaign, but they won’t tell you if the campaign is actually becoming more lucrative in the long run.

If I’m looking at fairly generic KPIs such as CTRs and campaign conversion rates, I often find my ego being fed by attractive statistics, but they don’t always generate ideas on how to improve the results. It is vital that the correct KPIs are being focussed on if your campaigns’ profitability is to be improved. This means looking at finer details, breaking down campaigns and working at keyword level instead to identify the strong & weak areas of the campaigns.

Ensuring Long Term Profit

I’ve always believed that a really effective and successful paid search campaign can never truly be “finished” or “achieved”. Markets & economies change all the time and consumer behaviour often changes in correlation. Therefore it is vital to monitor profits from very specific parts of a campaign as thoroughly as possible.

Here are three ways to ensure that long-term profit is the main focus for your campaign

1. Make decisions based on long-term profit, not short term performance increases

High CTRs, low Bounce Rates and high Conversion Rates (etc) are signs of a well-thought-out PPC campaign, but they don’t tell you if you’re making a profit long-term. Make sure these are in a healthy state, but make decisions using these statistics only in combination with data on all-time profitability.

2. Use Lost Impression Share data to make forecasts to increase overall revenue

Impression Share will tell you how many of the available impressions for your keywords your ads actually received and whether you lost out on any impressions due to your budget or rank. If you have a low impression share on highly profitable keywords, it makes sense to increase the budget or work on raising your Ad Rank to pick up 100% of the traffic.

3. Segment data by profitability and prioritise budget spend accordingly

Daily budgets are set at campaign level, but even if you use conversion optimiser you can’t ensure that your budget is being allocated more towards the most profitable keywords within each campaign. Here’s how to make sure you spend more money on more lucrative keywords, and less on keywords that convert, but at a higher cost.

Ensure you have the following columns in your keyword-level view:

  • Cost Per Click
  • Value Per Conversion
  • Cost Per Conversion
  • Search Impression Share
  • Conversion Rate
  • Total Conversion Value
  • Cost
  • Average Position

Using a date range based on how recently keywords have been altered on a large scale, export the data for every keyword into an excel spreadsheet. Create a new column called “Total Profit” and use the data from the Total Conversion Value & Cost cells to get the stats for each keyword. Set up rules in Excel so that the cells containing the above stats are colour-coded depending on their performance.

Once you have all the key metrics highlighted appropriately, filter the data by Total Profit and separate the positive and negative values into different tabs in Excel. Now you have a list of profitable keywords and a list of unprofitable keywords.

Profitable Keywords

With your list of profitable keywords, filter by impression share and use the Cost column to work out how much you would have needed as a daily budget in order to get 100% impression share. The formula to use is (Cost x 100) / Impression Share.

For example:

Keyword

Cost

Impression Share

Formula

Cost with 100% IS

Keyword 1

£50

50%

(£50 x 100) / 50

£100

Keyword 2

£20

80%

(£20 x 100) / 80

£25

Keyword 3

£10

20%

(£10 x 100) / 20

£50

TOTAL

-

-

-

£175

NB. The Total column when exported from AdWords will be based on a mean average, so the Cost with 100% IS result will be slightly different than the actual total of all the costs. Therefore it’s safer to use the formula for each keyword individually and then get the total from the column rather than using the row of average metrics exported from AdWords.

You will now have the data you need to build a new campaign containing profitable keywords, with a more effective budget. Provided that there is enough data to take as a good representation of how your keywords generally perform, your revenue will increase and the campaign will have a much better profit margin, as the unprofitable keywords are not included.

Unprofitable Converting Keywords

With your list of unprofitable keywords, filter by Average Position if there are any keywords with a position of 2 or better, separate these into another tab. Use the conversion rate for these keywords to identify the Average Cost Per Click (Avg. CPC) that would make the keywords profitable.

For example:

Keyword

Value
per Conversion

Conversion Rate

Formula

Target CPC

Keyword 1

£100

2%

(£100/100) / 2

£0.50

Keyword 2

£200

1%

(£200/100) / 1

£2.00

Keyword 3

£500

2%

(£500/100) / 2

£2.50

Once you’ve identified the break-even cost per click for each keyword, you can use this as the max. CPC when you create the new campaign in AdWords.

Non-Converting Keywords With Low Traffic

Between the two lists, take out any keywords with zero conversions and if any of them have less than 100 clicks, put these into another separate keyword list and create a new campaign for them called “Low Traffic Keywords”. Monitor the keywords weekly and pause any that accrue more than 100 clicks without producing a conversion. If any of the keywords do produce a conversion, work out if they’ve made a profit on that conversion and assign them to one of the other campaigns.

The Result

You will now have three campaigns to build, each with their own goals depending on how they have performed in the past:

  1. Profitable Keywords
  2. Unprofitable Converting Keywords
  3. Non-Converting Keywords With Low traffic

You will also now have a list of keywords with no conversions, but high traffic. It is best to either pause or delete these keywords, as they are unlikely to bring in revenue at the profit margin you are looking for.

The amount of traffic your keywords generate will determine how often you should carry out this keyword analysis, but it should ideally be looked at quarterly, at least. Ensuring that your keywords are segmented by profitability and potential profitability will make it much easier to reduce the amount you spend on under-performing keywords, whilst giving you an accurate idea of how much more money you can make from your profitable keywords.

Image Source

Pay per click concept with laptop and cursor via BigStock

Jamie Hallitt

Jamie Hallitt

Jamie specialises in building, managing & optimising SEO and PPC campaigns and has three years of experience in Digital Marketing. He has a particular interest in the professional services sector and multi-channelled eCommerce campaigns, focusing on ROI and conversion optimisation.

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20 Comments

  • Melanie Burgess 8th January 2014

    Hi Jamie,

    Just a quick question. When determining the cost of profitable keywords with 100% impression share, using the formula (Cost x 100) / Impression Share, how come keyword 1 is multiplied by 120 and not 100?

    Mel

    Reply to this comment

  • Melanie Burgess 8th January 2014

    Ah – no worries! Thought I was just getting myself confused!

    Mel

    Reply to this comment

  • Pingback: SearchCap: The Day In Search, January 8, 2014

  • Richard Fergie 22nd January 2014

    Hi Jamie,

    Thanks for pointing me at this on Twitter. Here are a couple of points:

    1. Considering profitability at all puts you way ahead of what a lot of other people are doing. So this is great!

    2. Be careful not to confuse profitability and ROI. For new or under developed accounts this distinction doesn’t matter so much as there are many tasks which improve both – but for matue accounts there is often a tradeoff between higher profits and higher ROI.

    3. My point two above is kind of similar to what you are saying about not just looking at metrics like conversion rate without context; a higher conversion rate on its own doesn’t mean the account is getting better – it might mean that the proportion of brand clicks is increasing (which could be good or bad). So we are definitely agreed on this!

    4. It is very important to realise that outputs do not scale linearly with inputs. This is the key assumption you make when doing your impression share calculations. Doubling the spend does not double the impression share – particularly as the impression share gets closer to 100%.

    5. The end result of a campaign structure that makes it easy to spend more money in profitable areas and less in other areas is good.

    Richard

    Reply to this comment

    • Jamie Hallitt

      Jamie Hallitt 23rd January 2014

      Hi Richard,

      Thanks very much for taking the time to read the post and for your thorough review.

      1. At the end of the day, the majority of clients I’ve worked with in the past have always has the same end goal; to make a profit, and I think it’s easy to lose sight of this goal when delving into the technicalities and monitoring different KPIs.

      2. Indeed I agree that ROI & profitability do not often have a distinct difference in purpose in terms of measuring under-developed campaigns; this was essentially the point of the post, to give people a way to segment their data based on the most important KPIs in the long term, if their account has not been producing the sort of profit they are looking for. By segmenting the data in this way I believe that you can focus on BOTH ROI and profit, because you’re looking at the stats that tell you whether you’ve profited from certain keywords, and then you’re splitting out keywords based on their specific ROI over time.

      3. You’ve hit the nail on the head with this, and worded it better than I did in the post! On a separate point I would personally measure brand related traffic completely separately because of the context of it, as you say.

      4. The Impression Share vs Cost formula I’ve worked included is fairly linear in the sense that it’s based on a specific statistic, but if the data you’re seeing tells you that you have received 50% impression share with your set budget, it would certainly makes sense to double that budget if you want to get as near as 100% impression share as possible. If you look at the other two examples in the table, I’ve simply worked out how much on average* you would have spent on that keyword if you had received 100% impression share, so if your ads had shown for 20% of the searches on a particular keyword and you’d spent X amount, the formula tells you what the cost would have been linearly, as you say. If you have a significant enough amount of data for this exercise to make sense, I can’t see a better way of setting a logical budget. I personally do not like to go by what Google tells me I should set as budget, because I like to have a little bit of human judgement in there to make sense of the data before using it to make improvements.

      5. Agreed. I also think advertisers with a limited amount of time to optimise their campaigns will benefit from this sort of structure, because you can set a benchmark for each campaign and (again, as long as the right KPIs are being used) easily see whether they are producing the desired results.

      *Just to be clear, I’m aware that past data cannot necessarily help us predict the future, because there are too many variables in the way to do so. However in my opinion it’s much better to use data & KPIs to make informed decisions rather than using your own personal expectations and opinions to decide whether a keyword is “good” or not. We could refer to Nick Christian’s talk about whether keywords are ever “bad”, but I think that’s a whole new blog post away!

      Thanks again for your feedback and discussion, I look forward to sharing more views & tips with each other in the future.

      Reply to this comment

  • Sam Hudson 23rd January 2014

    Very well put across and concise information, will be using this as a reference for the future.

    Many Thanks.

    Reply to this comment

  • Sam Austin 23rd January 2014

    Good read, very helpful, keep up the good work!

    Reply to this comment

  • Max 23rd January 2014

    Very informative! and presented clearly :)

    Reply to this comment

  • George mourne 23rd January 2014

    Nice Jamie good read and also very useful.

    Thanks!

    Reply to this comment

  • John 23rd January 2014

    Thank you for this Jamie, it has help me in my assignment on for my course at university :-) Looking forward to more posts.

    Reply to this comment

  • Nicole Covey 23rd January 2014

    Hi Jamie,

    This is a subject I had no knowledge on before reading, this blog has everything I need in order to gain a good basic understanding.. definitely something I will bookmark for future reference!

    Nicole Covey

    Reply to this comment

  • Richard Fergie 29th January 2014

    Here is the formula I would use to estimate the budget needed for 100% impression share. Obviously, not very accurate – but I think it gives better results than a linear approximation.

    The key assumption is that the number of impressions is not directly proportional to the amount spent, but instead is proportional to the square root of the amount spent:

    Impressions = k * sqrt(spend)

    Where k is some constant specific to the account at this moment in time.

    This means that to double the number of impressions, we need four times the advertising spend.

    So to increase the impression share from x to 100% we need (1/x)^2 times as much budget

    Reply to this comment

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