Summary:

  • Tracking the profit from each transaction generated from your online marketing gives you insights to what really moves the needle for the business
  • Setting ROAS targets based on an average of your margin per product is setting you up for failure
  • Tracking margins is error-prone as you don’t know what products were purchased
  • Profit tracking is the natural progression of revenue and ROAS tracking
  • When tracking profit instead of revenue/ROAS you will stop the endless guessing game of whether X is a good ROAS, or if you can increase profitable revenue by lowering ROAS – or if you can increase profits by lowering revenue and increasing ROAS
  • Smart Bidding is a challenge due to you changing the data, but it’s doable

Article breakdown:

  • The Big Picture: Meant for managers and owners who just needs the big picture
  • Playbook section: Meant for people who work hands on with Google Ads

We write a lot of posts about the basics. This post isn’t one of them. It should be, though.

I predict that within a few years, tracking revenue instead of profit will be compared to only tracking conversions instead of revenue for eCommerce. It’s just wrong.

We’ve worked with profit tracking almost since its inception (although it was clients that came with the technical setup, not us).

Before we get started, I want to clarify a couple things.

When I refer to profit tracking, I’m not suggesting  that you get a report of how much each campaign or marketing channel contributed to the bottom line.

I mean that you track the profit from each transaction, and that’s the value you send to Google Ads, Facebook Ads, Google Analytics, etc. Not the revenue.

Tracking your profits allows you to bid the exact amount you can afford so you can maximize profits in real time  instead of defaulting to an average Return on Ad Spend (ROAS) metric.

A 40% margin on a $10 product vs. a $100 product vs. a $1,000 product is very different. But most businesses have the same ROAS target no matter what product, category, or brand they’re promoting.

With profit tracking, you get to see the actual profit each keyword or product produced. That’s powerful, and I will explain why in this article.

A couple of new terms

Seeing this is a rather new field for most people, I want to explain some of the terms we’ll use in this post:

Profit: This is the profit derived from each transaction. It includes discounts, cost of goods sold, shipping, taxes, transaction fees, etc., but doesn’t include overhead, warehouse costs, or the cost of the ad spend (although it could).

Profit on Ad Spend (POAS): Similar to ROAS, but instead of revenue, we use profit.

How Most Businesses Establish ROAS Targets

The most common way to establish a ROAS target is by using the following method:

Target ROAS vs. Profit Tracking

  • Shoes: Low margin, so ROAS should be 500%
  • Socks: High margin, so ROAS should be 250%

Let’s set the target to an average of 375% ROAS and see where it goes.

Yes, I’m simplifying and exaggerating, but bear with me here..

In the end, it means that by pushing a 375% ROAS, you’re potentially leaving money on the table as you are not pushing the sock market as hard as you could.

And you’re potentially losing money on selling shoes.

But it averages out, right?

And that’s the problem. It doesn’t always average out, and it shouldn’t. You have the option to do something smarter. Do it.

Tracking Profits Allows Your Bidding to Focus on Profitable Products

When your main goal is to maximize revenue at or above your ROAS target, then you don’t bat an eye at the lone profitability of a product.

A product selling for $100 with a 20% margin looks just as good as a $100 product with a 40% margin.

Both products will show the same ROAS and revenue.

But from a business standpoint, it’s not the same at all. And that’s truly what profit tracking is all about.

It gives you the ability to focus your efforts on products based on the true business meaning that they have for your business. Even if you are fine with losing a bit of money on a product as a loss leader, then you should still aim to track profits rather than revenue.

By knowing the profit, you can set a level of how much money you want to lose on each transaction. It gives you so much more room to maneuver that you’ll be surprised you never did this before.

How Profit Tracking Works in Practice

Our favorite partner – and the only we know of – is ProfitMetrics.io.

In short, it works by making a profit calculation for each transaction. Instead of sending the full conversion value to Google Ads (or Analytics or Facebook Ads), it sends only the profit value to Google Ads.

Here’s an example:

If you were to sell four chairs at 1,099 kr. per chair at a 10% discount, that would result in a revenue of 3,956 kr.

That’s your conversion value.

But after doing the profit calculation:

  • Four chairs at 1,099 kr. each
  • 40% margin (tax included)
  • 10% discount
  • 90 kr. shipping, transaction fees, and packaging

We end up with 1,758 kr. in profit, including the 40% margin before including the discount.

The margin of 40% was based on the regular price, not the discounted price.

So after removing the difference between our regular price and our discounted price, the profit is decreased to:

1,758 – 439.6 = 1,318 kr.

Shipping costs are 90 kr., so total profit from the sale is 1,228 kr.

That’s the value that is sent to Google Ads by ProfitMetrics, and that you base your bidding on.

Case: 11% revenue increase, 84% profit increase. Wait, what?

For a case we’ve been running for a long time, we agreed to try to push for a higher profit level. We were  already happy with the improvement made over our time working together, but the question remained:

If we worked on a 2x POAS instead of a 1.5x POAS, how much would our profit volume go down?

So we started pushing the bidding towards a higher POAS knowing all too well that our profit-volume would decrease in the experiment.

Profits went up—big time. We increased profits by 84% compared to the year before.

When I reviewed the numbers in Google Analytics, I was astounded.

It only tracked an 11% increase in revenue.

For accounts of this size, we’d be OK with that improvement. But compared to an 84% increase in profits, the 11% increase in revenue was abysmal.

Don’t Worry About Implementation, Just Get Started

I always recommend just getting started with some things. Implementing profit tracking is a big deal if you try to do everything at once. But it can all be boiled down to a couple key steps:

  1. Set up ProfitMetrics: This allows you to understand your profit levels as you increase or decrease your ROAS targets. Just this should be enough motivation.
  2. Import profit into Google Ads: Now you can see the profit numbers live in your account.
  3. Launch your campaign: Start bidding based on profit instead of revenue.

It all starts at step one, which is harmless and it doesn’t require you to make any changes to what you do today.

It’s also not “yet another metric” to track. It’s THE METRIC to track.

So I challenge you to get started.

SavvyRevenue playbook for Google Ads

Tracking Product / Category-Margins vs. Profit – What is Best?

One solution that has gained a lot of traction in Google Shopping the last couple of years is using margins in a custom_label. This allows you to set lower ROAS targets for products with a high margin and vice versa.

The challenge with margins is that they only tell you the margin of the product that users click on, not what they ended up buying.

Custom_Label vs. Profit Tracking

You might not think that’s a big deal, but it is depending on the size of your eCommerce store.

A way to find out is to check the Google Analytics product performance report vs. the Google Ads report. Compare the SKU number with the item ID in Google Shopping, and you should get an idea of how many sales are generated directly from Google Shopping for a product after it’s clicked.

Just limit the traffic from Google Shopping only in the segment part:

Traffic from Google Shopping

(The segment is custom for us, so you have to create it yourself).

At the end of the day, applying your margins in a custom_label is better than not doing anything. But when you have the option to track profit directly, then it’s the preferred method by far.

Key Areas That Change When You Shift to Profit Tracking

Small POAS Fluctuations Should Be Taken Seriously

Small changes in your POAS will mean that your bottom line sees significant changes.

Remember:

  • POAS = Profit on Ad Spend
  • ROAS = Return (revenue) on Ad Spend

Before, when your ROAS would shift from 500% to 520%, you wouldn’t lose sleep over it. It’s a minuscule change. That habit is dangerous when you start tracking profit instead of revenue.

Seeing that we are only importing profits to Google Ads, we have a lot less. Not in terms of the number of conversions, but of the actual value from each conversion.

A similar change in POAS going from 200% to 220% would basically mean a 20% increase in profits.

Or if you go the other way, like from 200% to 180% POAS, that results in a 20% decrease in profits.

That’s a significant change.

Let’s run the numbers:

  • 200% POAS on a 100k ad spend is 100k in profits
  • 220% POAS on a 100k ad spend is 120k in profits – a 20% increase in profits

With the same percentage point increase for ROAS, the numbers are completely different:

  • 500% ROAS on 100k ad spend is 500k in revenue
  • 520% ROAS on 100k ad spend is 520k in revenue – a minuscule 4% revenue increase

PErcentage Profit Tracking vs. ROAS

The bottom line: As a PPC specialist, you have to become much more astute in your account analysis. Small fluctuations in your POAS should be taken seriously.

Profit Volume is King When Tracking Profits

Forget the days of trying to offset your ROAS and your revenue to find the perfect balance. Even if you’re used to trying to balance the POAS with the highest profit volume, don’t.

All that matters now is  getting the highest profit possible.

If that’s at 120% POAS instead of 200% POAS, then that’s your target.

Of course, try to balance your immediate profits with the number of new customers you’re getting and their lifetime value. But no more judging your Google Ads account based on the POAS level. Profit is king!

How to Use Profit Tracking in your Google Ad Optimizations

Start With a Slow Transition

You’re changing your entire data foundation. That’s kind of a big deal (but worth it). Any automated bidding that you have running will have to be paused (I’ll show you how to mitigate risk).

So it’s key that you’re doing a slow transition and don’t shock the system.

The way to do this is:

  1. Set up your profit numbers to Google Analytics with ProfitMetrics
  2. Import your profit value to Google Ads from Google Analytics (but don’t count them as conversions)
  3. Set up a custom column to show your profit and POAS
  4. Compare your new POAS numbers with your ROAS revenue numbers
  5. Understand what  certain ROAS levels mean in terms of profit
  6. Once understood, replace your revenue with your profit conversion

Let’s go through them one by one:

  1. Set up your profit numbers to Google Analytics with ProfitMetrics
  1. Import your profit value to Google Ads from Google Analytics (but don’t count them as conversions)

How to use profit tracking

  1. Set up a custom column to show your profit and POAS

custom column profit tracking

  1. Compare your new POAS numbers with your ROAS revenue numbers

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  1. Understand what  certain ROAS levels mean in terms of profit

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  1. Once understood, replace your revenue with your profit conversion action

For this part, you simply go into your conversions and set your profit conversion action to “Yes” in the “Count in Conversions” section and set your revenue conversion action to “No”:

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Make the Shift on the First of the Month

When you replace your revenue conversion action with your profit conversion action, it’s great to do it on the first of the month. It makes it much easier to keep track of in the future.

Of course, setting a note in Google Ads helps (and you should do this anyway), but setting it on the first always helps.

Once you make the shift, let your account run for at least seven days before you start making bid changes (unless it’s completely wrong). And if you can wait 14 days, do that.

Avoid any other changes to the account or site in that period. You need stable data to set the bids moving forward.

Relaunch your bids after the 7-14 days.

Changing to Profit Tracking is Tricky for Smart Bidding

Smart Bidding lives off historical data and predictability. So changing its data foundation is kind of a bad idea. But in the long run, shifting to profit tracking is still a good idea—even if you experience a small dip.

To mitigate the risks of changing your conversion data, you can do a couple of things:

  1. Pause Smart Bidding and manage your bids manually
  2. Change your Smart Bidding from Target ROAS to Target CPA

The challenges with moving to manual bidding again can include:

  1. You can’t “just” make the shift to manual. (Note:when you disable the bids, they  go back to whatever bids you had when you enabled Smart Bidding)
  2. You’re not used to manual bidding anymore
  3. You might have to wait up to 28 days before you can re-enable Smart Bidding

But,  the majority of great PPC specialists can do it.

Using Google Ads Editor to Set the Right Initial Bids Manually

The best way to set the right bids manually after disabling Smart Bidding is to download metrics to Google Ads Editor.

One trick is to download the account to Google Ads Editor before you disable Smart Bidding. This way, you receive the bid  the moment you download it:

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But the issue is that Smart Bidding sets a bid based on the time of day, the search term, the audience, and other factors. So the bid set on the keyword level is not super reliable.

If you compare the maximum CPC (bid) with the average CPC in the screenshot, you see that it’s not aligned at all.

Our solution to this is to set the bids 10% higher than the average CPC has been in the last seven days. This gives us some confidence that the bid isn’t just set at random.

Copy the bids to Excel, run a quick formula, and then upload to Google Ads Editor again:

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Just remember to also set the right mobile bid adjustments for mobile, desktop, and tablet  on the campaign and ad group level. Don’t forget ad group level as any ad group level adjustment will override your campaign adjustment.

Areas to Optimize After Successfully Implementing Profit Tracking

Your fundamental optimization routine shouldn’t change after implementing profit tracking. But there are some areas that you should revisit:

Bidding

  • You need to find the best possible POAS level that produces the highest profit volume.

Mobile bidding

  • Consider how much profit mobile should produce. Are there many people researching on mobile and buying on computers? Use Facebook Analytics for this insight.
  • Consider breaking up your mobile and desktop campaigns. Maybe 150% POAS is ideal for mobile, but on desktop, 200% produces the highest profit volume.

Ad messaging

  • What works best now that you track actual profit?
  • Promotions? New Selection? Free Shipping? Seasonal? Show higher “from” prices?

Landing pages

  • Test new product sorting: Lowest price, first? Most expensive, first? Most popular, first? Newest, first? Or a custom sort?

Keywords

  • Keywords that might have been solid options when measuring ROAS might not be as profitable as you thought.
  • The opposite might also be possible, so try restarting keywords.

Products

  • This is exactly the same as above. But keep in mind that as you find out some keywords or products are less profitable than you thought, you might sell a lot fewer. Consider how this impacts your purchasing abilities.

Google Shopping

  • Again, consider splitting mobile and desktop to set individual targets.
  • Consider showing new products vs. on sale products (or vice versa).

And much more, but this is a great starting point for you.

Don’t Worry About Implementation, Just Get Started

I always recommend just getting started with some things. Implementing profit tracking is a big deal if you try to do everything at once. But it can all be boiled down to a couple of key steps:

  1. Set up ProfitMetrics: This allows you to understand your profit levels as you increase or decrease your ROAS targets. Just this should be enough motivation.
  2. Import profit to Google Ads: Now you can see the profit-numbers live in your account.
  3. Last step: Start bidding based on profit instead of revenue.

It all starts at step one, which is very harmless and it doesn’t require you to make any changes to what you do today.

It’s also not “yet another metric” to track. It’s THE METRIC to track.

So, I challenge you to get started.

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