This holiday season, it’s about finding that perfect balance that helps you drive more sales and maximise profits. At Retail Ready Live: Peak 24, Google shared valuable insights to help businesses navigate the peak season.
One of the key themes to optimise better campaign results was the importance of advertising efforts with the cost involved. Not knowing the effectiveness of your ad campaigns can lead to wasted resources.
While a high ROAS is important, it doesn’t always equate to higher profits. Understanding unit economics is crucial for making informed decisions.
Here are the key takeaways shared at the breakout sessions.
ROAS vs. Profit
Higher ROAS does not equal higher profit. While a high ROAS is important, it doesn’t always equate to higher profits. Understanding unit economics is crucial for making informed decisions.
Unit Economics Calculator
It is crucial to forecast pricing with a performance planner. Use this tool to align budgets with demand and optimise campaigns for peak season.
Performance Planner
Maximise your profit with smart bidding. Use powerful smart bidding strategies to automatically optimise bids for the best possible results. Not knowing your ad campaigns’ effectiveness can lead to wasted dollars and inch you away from reaching business goals.
But it doesn’t have to be this way. Let’s look at these points in detail.
ROAS VS Profit
ROAS measures the revenue generated from advertising expenses. Profit, on the other hand, is the net income after deducting all costs.
While a high ROAS is generally desirable, it doesn’t guarantee higher profits.
Here’s why:
- Unit Economics: The profitability of each unit sold is crucial. Even with a high ROAS, if the COGS per unit is too high, the overall profit margin may be low.
- Fixed Costs: Fixed costs, such as rent, salaries, and utilities, remain relatively constant regardless of sales volume. If a business increases advertising spending to achieve a higher ROAS but doesn’t increase sales significantly, the fixed costs may outweigh the additional revenue, leading to lower profits.
- Customer Acquisition Cost (CAC): If the CAC is too high, even a high ROAS may not be sufficient to generate profits.
- Long-Term Sustainability: A high ROAS might be achieved through short-term tactics, such as aggressive discounting or promotional offers, that may not be sustainable in the long run. These tactics can harm brand perception and reduce customer loyalty, ultimately impacting profitability.
To make informed decisions about advertising, it’s essential to understand unit economics.
Unit Economics Calculator
A unit economics calculator is a financial tool to assess the profitability of each individual unit sold by a business. It measures the underlying health of a company’s operations.
Key Components of a Unit Economics Calculator
Above the surface
- Online Revenue: Total revenue generated through online sales, including D2C and marketplace channels.
- ROAS Target: Set a benchmark for your business to determine the effectiveness of your marketing campaigns.
Below the surface
- Profit Margins: What is the percentage of revenue that remains as profit after deducting all costs? Only a high profit margin indicates a profitable business.
- Variable Costs (Shipping, Fulfilment, Returns): These vary with the level of production or sales, such as shipping costs, fulfilment expenses, and return processing fees.
- LTV (Repeat Purchases, Subscription Fees, Payback Windows): The revenue a customer generates over their lifetime relationship with a business. Take repeat purchases, subscription fees, and payback windows into account.
- Changing economic landscape: External factors that can impact a business’s unit economics, such as economic downturns, changes in consumer behaviour, and industry trends.
Somewhere between break-even ROAS and your ROAS target is your sweet spot. The desired level of ROAS should be more than that to cover its costs and avoid losses.
Performance Planner
Performance Planner is a campaign & account forecasting tool in Google Ads that helps you remove guesswork by automatically predicting clicks, conversions, and conversion values. It is based on your inputs of different spend levels and return-on-investment targets and helps you plan up to 18 months ahead.
Key Steps in Using Performance Planner
Define Your Growth Plans
Outline the desired growth objectives. Add increasing sales, improving brand awareness, or driving more website traffic.
Input Your Target
Specify the target metric you want to forecast such as a desired number of clicks, conversions, or a specific ROAS.
Choose the Lookback
Select the timeframe you want to use for historical data.
Analyse Historical Performance
Review the past campaign performance to identify trends, seasonality, and areas for improvement.
Determine the Marketing Objective
Understand the overall marketing goals to align your forecasting efforts with the broader strategy.
Pick the Metric to Forecast
Choose the specific metric you want to predict, such as clicks, impressions, conversions, or CPA.
Use Google Data Enhancements
Take advantage of Google’s data-driven insights:
- Traffic Trends & Forecasts: Analyse historical traffic patterns and use Google’s forecasting capabilities to predict future trends.
- YoY Query Growth: Compare current query growth to year-over-year trends, taking into account seasonal fluctuations.
- Auction Dynamics: Assess the competitive landscape and predict future auction dynamics to inform your bidding strategies.
- Competitive Insights: Gain insights into your competitors’ activities to identify opportunities and potential challenges.
Performance Planner helps you:
- Make informed decisions about your campaigns.
- Plan your budget, allocate resources, and set realistic goals.
- Adjust your bidding strategies, targeting, and ad creative to improve campaign performance.
- Track progress towards your goals and measure the effectiveness of your marketing efforts.
Bid To Profit
Bid to Profit is a strategic framework used in online retail to optimise bidding strategies and maximise profitability. Analyse product information, margin, stock levels, and historical performance to determine the optimal bids for different products.
Key Components of Bid to Profit
Data Points
- Your Business Intelligence Data: Data on sales, revenue, cost of goods sold, marketing spend, and other relevant metrics.
- Margin: The difference between the selling price and the cost of a product.
- Stock: The quantity of a product available for sale.
Product Categories
The Bid to Profit framework typically classifies products into two categories based on their value and incremental opportunity:
- Low Value for You, Lower Incremental Opportunity: These products have a low margin and limited potential for increased sales or profit.
- High Value for You, Higher Incremental Opportunity: These products have a high margin and significant potential for increased sales or profit.
How to Use the Bid to Profit Matrix
- Classify Products: Categorise each product based on its margin and incremental opportunity.
- Analyse Data: Evaluate the data points for each product, including stock levels and historical performance.
- Determine Optimal Bids: Use the matrix to determine the appropriate bidding strategy for each product. Products in the ‘High Value, High Incremental Opportunity’ category may warrant higher bids to maximise sales and profit.
The Bid to Profit framework relies on data-driven insights to inform your bidding strategies. Allocate your bidding budget by understanding the value and potential of each product. Improve your ROI by optimising your bidding strategies for your advertising campaigns.
Need a fresh perspective? Let’s talk.
At 360 OM, we specialise in helping businesses take their marketing efforts to the next level. Our team stays on top of industry trends, uses data-informed decisions to maximise your ROI, and provides full transparency through comprehensive reports.
