How to drive profit, not just clicks

Profitability should be your top priority if you are an e-commerce company. No question about it. With average order values down and inflation still persistently high, your margins are going to experience significant pressure. Therefore, it is crucial for you to be smarter about how you optimise your marketing effort.

In this post, I’ll take you through how to leverage your own data to gain an advantage with your media buying. Going from Apprentice to Pioneer strategies, I will share how to implement simple changes to your campaign structure or give the algorithms better signals to optimise towards. However, the first step – getting the data right.

How do you calculate your profitability?

Before you start optimising for profit, you first need to know what your profitability per item is. Sounds simple, but it’s often a complex question.

Our recommendation is to start with subtracting unit cost from revenue, and forget about tax and shipping costs in your first iteration.

Once you have defined your product profit, you can calculate the current gross margin and help identify brands, product categories or even individual items that drive profit, not just revenue. You are now one step closer to activating your data.

Strategies: from Apprentice to Pioneer

Apprentice: Segmenting your products

The most simple, but still effective way to steer your media buying towards profitability is using custom labels and campaign segmentations. Platforms like Google Ads and Meta Ads allow you to segment campaigns and set individual targets for specific product sets by uploading feeds that label each item.

By having lower return on ad spend (ROAS) target for high margin products, those products will be prioritised when the platforms serve dynamic ads, like Google Shopping Ads or Meta Dynamic Product Ads – and vice versa for low margin items. This strategy can be implemented in a matter of hours once you’ve analysed your product profitability and can get you much closer (though not all the way there) to optimising towards profits.

The steps are:

• Segment all your products into HIGH, MEDIUM and LOW based on their gross-margin.
  • Make it simple:Bottom 25% = LOW
    TOP 25% = HIGH
    The rest = MEDIUM
• Upload a supplemental feed file with your segmentation to the ad platforms
• Create a campaign per label and link your product feed with each of the categories
• Define your overall ROAS target and set individual targets for each campaign. Example:
  • Your ROAS target overall is 800% and your average gross margin for your HIGH and MEDIUM products is 82% and 55% respectively. You can calculate the new target for your HIGH campaign like this: (55%/82%)*800% = 543%.
• You are now ready to optimise towards profitability!

Here’s an example on how to do this.

Accelerator: Using profit conversion signals

Changing prioritisation for your product ads is great, however, it will only get you so far. It won’t help you optimise your media buying of non-product ads, like keyword targeting campaigns in Google Ads or Image ads with Meta Ads. It also does not help optimise for products that have a low margin but might also promote sales of other high margin items. To do this, we need to change the signal the algorithm optimises towards.

There are a few ways to do this. If you store the item profit in your website’s data layer, you can send the data with your already existing conversion pixel. However, using this method exposes your margins to snooping competitors. At Precis, we have developed a solution, Enhanced Signals, which allows businesses to do the profit calculation after the transaction has occurred and upload a new conversion value in platforms using offline conversion uploads. Using this solution simply requires you to create a file with Product SKU, Unit Cost, Currency and Market (optional) and reach out to us so we can help implement a new conversion tag.

Using this, Enhanced Signals subtracts an item’s unit cost from transaction revenue and allows you to send profit data directly to your ad platform.

Pioneer: Using expect profit as conversion signals

Once you are able to send profit conversion signals to the ad platforms for optimisation, you are really far in the process of truly focusing on creating true business value. However, besides the direct costs and revenue associated with a sale, there are a lot of indirect value that is not captured by just looking at product profit. For example:

• Some products might have a higher rate of return which is a hidden cost.
• Some products might have higher rate of leading to re-purchase by the customer which is a hidden revenue.

If we truly want to optimise towards profit, we need to consider the expected cost and value created after the initial purchase. To unlock this value opportunity, you truly need to understand your customers purchasing patterns and digging deeper into behavioural data will allow you to estimate future value created. Using custom rules, you can adapt the initial profit signal and thus optimise truly towards your business goals. Precis’ solution, Enhanced Signals, can allow you to do this, however, YOU need to understand YOUR data before getting there.

Optimising towards expected profit is not easy, but the reward is immense and worth it since it makes your media buying more sustainable.

Summary

My best advice for any business wanting to improve their media buying is “something is better than nothing”. Taking the first step by collecting data needed to make the assessment about profitability is hugely important in reaching your end goal, and a must for all e-commerce businesses in the current financial environment. So just get started!

Learn more about how to activate your marketing data with Enhanced Signals. Or get in touch for a full consultation.