One of the most confusing areas in paid search for e-commerce advertisers is bid management. Making sure you aren’t overpaying for keywords, knowing how to increase profits on your best performing keywords and understanding how to interpret conversion data intelligently, are a just a few places advertisers get lost.

Unlike offline businesses, that are usually limited to tracking leads and have to work harder to tie an offline sale back to a keyword, e-commerce businesses can have their sales and revenue data easily integrated into AdWords and use it to intelligently optimize their campaigns.

Understanding what to look for, and how to optimize based on ROI, is crucial for all e-commerce advertisers running paid search. Not all keywords perform the same and not all products have the same profit margins. This makes it even more important for advertisers to be able to quickly evaluate ROI and performance for each product and make changes as needed.

I’m going to show you a step-by-step process you can implement in your e-commerce business to take the conversion data you’ve accumulated and leverage it to maximize profits.

Step 1 – Setup Revenue and Conversion Tracking in AdWords

Shockingly, many of the e-commerce accounts we’ve audited in the past do not have accurate conversion tracking, and for those that do, many do not have revenue tracking enabled. Understanding when a sale occurs, how much you spent to create the sale, and how much revenue resulted are basic metrics that must be tracked if you want an idea of where your sales and profits are coming from in AdWords. There is no way to determine your target cost per sale (CPA) and remain profitable without this data. Step 1 is making sure this is setup correctly.

Quick Note: If you already have conversion and revenue tracking set up in AdWords you can skip to Step 2, if not, follow the instructions in this step, and use our optimization process when you have enough data. In the meantime, I’ve included a formula in Step 3 that can allow you to estimate your max cost per click (CPC) while you wait for data to accumulate.

AdWords allows you to track conversions and revenue simply and easily. Start by visiting the “Conversions” section of your AdWords account under the “Tools” menu in the navigation. Then click on the “+Conversion” button and choose the “Website” conversion option.

Enter the details for the new conversion, but pay close attention to the following fields:

Value - This is where your website will tell AdWords how much revenue was created from each conversion. For our purposes, you have two options to choose from depending on how your products are priced.

Option 1 – All products have the same price & no add-ons/upsells
If all of your products are the same price and there are no upsell options (anything that would increase the total order value) you can choose the “Each time it happens, the conversion action has the same value” option and enter the revenue for each sale. We’ve entered “$100” as the conversion value in the example below.

Option 2 – Products have different pricing or add-ons/upsells
Most ecommerce advertisers fall into this category, so using a static value is not going to work for them. In this case, you would select the option that says “The value of this conversion action may vary.”

In the default value field, we like to insert a placeholder value like “1234.” This will make it easier to later replace this value with the dynamic transaction value variable provided by your store’s shopping cart software in the AdWords conversion code.

For more details consult the AdWords help article on implementing Revenue Tracking.

Conversion Windows - We typically change the time to track conversions from the default 30 days to the max of 90 days. This is especially helpful for us to track products with longer sales cycles and to make sure we are seeing all of the conversion data available.

Once you’ve filled in all the required fields click “Save”, then send your webmaster the conversion code with instructions to replace the placeholder conversion value of “1234” with the dynamic order value token provided by your shopping cart software. They can add this code to the “order confirmation” page customers reach after they make a purchase.

Your dynamic order value token might look something like this: {{ transaction.amount }} which you would use instead of the placeholder values we used earlier. Compare the highlighted areas in the tracking code below that shows what the code might look like before and after we’ve done this.

Before:

After:

In the “After” code above we used our example dynamic order value token of {{ transaction.amount }} and simply replaced the “1234.00” placeholder text. This should dynamically insert your actual order value provided by your shopping cart software and share the information with AdWords.

Technical Note: Some websites trigger an event after purchase rather than sending purchasers to a confirmation page with a new URL. In this case, there is a slightly different setup process and conversion pixel for this type of website, but it’s still relatively simple to implement. Follow Google’s documentation to track transaction-specific conversion values.

Step 2: Know Your Numbers

Understanding the profit margin for each product (or product type) you sell is important. This is how you’ll be able to set bids based on ROI in the coming steps. Shockingly, we’ve found that many advertisers don’t really know what their margins are for each product they sell. Make sure you have the profit margin numbers available for each product (or product type) as they are needed for the upcoming steps.

In addition to knowing the profit margins for each product, determine how many of your conversions happen offline. If your e-commerce store sells items that are typically customizable there may be a large number of people who order over the phone rather than online. Having an idea of what percentage of sales these “offline” conversions make up is crucial to understanding your true ROI.

This blog post won’t cover factoring in the offline conversions as a formula for bid adjustments. Just keep in mind that if 20% of your conversions happen offline, you will need to factor that missing portion in with the AdWords provided statistics below.

Step 3: Begin to Optimize Bids Based on ROI

So now we get to the fun part. You have revenue and conversion tracking in place and you know your numbers. Hopefully, your AdWords account is structured in an intelligent way to make things faster and easier. If not, you may want to consider an account restructure that segments different types of products and product types to make this easier going forward.

For those of you who don’t have any data available yet, don’t worry. I’ll show you a way to estimate your target max CPC using your profit per sale and your website’s conversion rate to make sure you are not bidding higher than makes financial sense to do.

Preparing Your Data

What we need to do first is to enable a few columns in AdWords to help us analyze our current profitability and make bidding easier. First, head over to the “Keyword” tab in AdWords and click on the “Columns” button right below it. Click on “Modify” and look under the “Conversions” section to include the following columns:

• Conv. Value / Cost
• Conversions
• Cost / Conv.
• All Conv. Value (revenue generated)

Click “Apply” once you have selected these columns.

Next, start with keywords related to one of your products and look at the “Conv. Value / Cost” column to determine if the keyword is profitable. If you see a value in this column greater than “1” it means you have generated more revenue than you’ve spent in AdWords for this keyword.

By looking at this column and the profit margins you can quickly see which keywords you are losing money on, breaking even on, and making a profit on, but you still need to factor in your profit margins.

Here’s an example of what this might look like:

• Keyword – “Nike tennis shoes”
• Average CPC – $3.10
• Cost – $154.13
• Conversions – 9
• Cost per Conversion – $17.11
• All Conv. Value / Cost – 2.8
• All Conv. Value (Revenue) – $435.17

Looking at the metrics from the above keyword we can see that the revenue generated is approximately 2.8 times the amount we’ve spent on it. If we know that Nike tennis shoes typically have a 30% profit margin after factoring in our hard costs, shipping, etc., then we need to determine whether or not we’ve made money on this keyword.

You can use this formula to determine whether a keyword is profitable based on the information above and factoring in your profit margin (Don’t worry I’ll show you an easier way for AdWords to do the math for you below). This formula can be used for any traffic source, not just AdWords:

(All Conv. Value * Profit Margin) – Cost = Profit/Loss

Using the example data above and our example 30% profit margin the formula would look like this:

($435.17 * 30%) – $154.13 = ($23.58)

So this keyword actually lost us money and we need to either figure out ways to make it more profitable (negative keywords, ad copy, etc.) or reduce the bid to bring the CPA in-line with our target (more on this later).

Let AdWords Do the Math

Thankfully there is a faster way to tell which keywords are profitable or losing money. The “All Conv. Value / Cost” column we enabled earlier will save us a bunch of time when coupled with the cheat sheet below.

10% Profit Margin = 10.1 or higher All Conv. Value / Cost
20% Profit Margin = 5.1 or higher All Conv. Value / Cost
30% Profit Margin = 3.4 or higher All Conv. Value / Cost
40% Profit Margin = 2.6 or higher All Conv. Value / Cost
50% Profit Margin = 2.1 or higher All Conv. Value / Cost
60% Profit Margin = 1.7 or higher All Conv. Value / Cost
70% Profit Margin = 1.5 or higher All Conv. Value / Cost
80% Profit Margin = 1.3 or higher All Conv. Value / Cost

To understand the numbers above, look at the profit margin that is closest to your business’s/product’s profit margins on the left. Then, look at the corresponding value in the “All Conv. Value / Cost” column that indicates if a keyword is profitable (although very close to a break-even). These numbers are not exact and don’t factor in offline conversions, but are pretty accurate and should save you a lot of time when making bid changes.

Going back to our example above, we have a 30% profit margin on Nike tennis shoes. We can use the information in the cheat sheet to see which keywords are making us a profit by looking at any keyword that has a value of “3.4” or greater in the “All Conv. Value / Cost” column. We can also do the inverse to find keywords that are costing us money.

Using AdWords Filters

Since this is an ongoing process that should be done at least monthly, you can set up “filters” in AdWords which are essentially saved searches. You may want to set up a saved search for “Profitable Keywords” which have a All Conv. Value / Cost number that indicates you are profitable.

You can do the same for keywords that are losing money (below the minimum All Conv. Value / Cost number needed). This way you can easily apply the filter and see what is going on from a top-level view of your account. This can be a great time saver as you continue to optimize your account.

What if you Don’t Have Conversion or Revenue Data Yet?

For those who may have recently implemented tracking and have no data, here’s a simple formula you can use to determine your max CPC for any traffic source. You’ll have to know your profit per sale and your website’s conversion rate to use it. The formula is:

Profit per Sale ($) * Conversion Rate (%) = Max CPC

So if your website has an 8% conversion rate and a $40 profit per sale the formula would look like this:

$40 * 8% = $3.20 Max CPC

Using this formula for each keyword (or group of keywords related to a particular group of products with the same profit value) can tell you the max you can bid. You can easily export your keywords from AdWords Editor into an Excel spreadsheet and use bulk formulas to speed this process up. Then import the changes to the bids in AdWords Editor and post them to your account. ALWAYS double check your spreadsheet before you import it for accuracy.

Adjusting the Bids

Now that we know which keywords are making or losing money we need to make intelligent bid adjustments. There are many factors that play a part in whether a keyword is truly profitable such as second click conversions (First Click Analysis), Assisted Conversions, Lag Time, etc., which we cannot cover in this post. That being said, this is a straightforward approach that will take care of the majority of the bid adjustments needed to make your account profitable.

Keywords that are Profitable

For keywords that are profitable, it’s a good idea to get more traffic if it’s available. That is typically done by increasing your bids, increasing your CTR with ad testing, weeding out bad clicks from unwanted searches (negative keywords), or some combination thereof. Let’s talk about increasing the bids.

We want to make sure that we increase the bids intelligently to maintain profitability. If we increase them too much we may begin to lose money. Our approach is typically an incremental bid increase. We make bid adjustments using certain criteria to ensure we are not increasing too much or too little. Here’s an example rule we might use to adjust bids for profitable keywords.

Using our 30% profit margin model above (which means we would need a 3.4 value in the All Conv. Value / Cost column to be profitable) we might increase bids as follows:

Keywords with “All Conv. Value / Cost” value between 3.9 – 4.5 = 5% bid increase
Keywords with “All Conv. Value / Cost” value between 4.6 – 6.0 = 10% bid increase
Keywords with “All Conv. Value / Cost” value between 6.1 – 8.0 = 15% bid increase
Keywords with “All Conv. Value / Cost” value between 8.1 – 10.0 = 20% bid increase
Keywords with “All Conv. Value / Cost” value between 10.1 – 15.0 = 25% bid increase

This is only an example, the point is we adjust bids in brackets based on profitability to maintain that profitability. Once you determine the best model to use set up additional “Filters” in your AdWords interface to make this task even easier.

Keywords that are Losing Money

Much like we do for profitable keywords we also look at incrementally reducing bids for keywords that are not profitable. Once again this is in addition to weeding out untargeted search terms (negative keyword additions) and other optimization techniques that might help a keyword perform better.

Using our 30% profit margin model above again (which means we would need a 3.4 value in the All Conv. Value / Cost column to be profitable) we might decrease bids as follows:

Keywords with “All Conv. Value / Cost” value between 2.5 – 3.0 = -10% bid decrease
Keywords with “All Conv. Value / Cost” value between 1.5 – 2.4 = -20% bid decrease
Keywords with “All Conv. Value / Cost” value between .5 – 1.4 = -30% bid decrease
Keywords with “All Conv. Value / Cost” value equal or less than .4 = consider pausing

Once again creating “Filters” in AdWords makes this process easier and faster to implement after you have everything in place. Please also note that you may want to use a filter to find “Keywords Below 1st Page Bid” because some of your search terms may now be below the minimum bid. In some cases you may still want ads to show for these terms, but you should review them manually to determine this.

How Often Should You Adjust Bids?

Knowing how often you should adjust bids is not a perfect science. Understanding what is happening in your account and how often changes are taking place to ad copy, keywords, etc. help determine how often bids should be adjusted.

Also keeping in mind the amount of traffic a keyword is receiving is a big factor. It’s typically hard to have statistical data of any significance for keywords that have received less than 100 clicks. Although this isn’t always the case, there will always be keywords that get more traffic than others which means their bids should be adjusted more often.

Our advice is to look at your account each week to make changes to high volume keywords and maybe once per month on the lower traffic terms. This would not apply if there are keywords that are clearly not profitable which we would adjust as soon as that is determined.

Conclusion

So there you have it. A simple, step by step process you can follow to make e-commerce bid management less painful and more profitable. Make sure you have the data you need, know your numbers, and adjust your bids into profitability. If you need help with your AdWords PPC campaigns, contact PPC Professionals today for a free audit at (954) 606-5359.