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Use Profit As Your Guiding Metric - Other Standard Metrics Are Flawed

Oct 11, 2007
An incredibly important, and often overlooked, aspect of measuring the effectiveness of your online advertising is using profit as your guiding metric. So what does that mean?

To understand this, I first want to point out how the other metrics that most online advertisers are using today, including ROI, conversion rate, etc., are flawed. I want to work through an example here that will demonstrate why profit is the best metric to use when making online advertising decisions.

Our example is a company that sells TVs online and has three keywords that comprise their PPC campaign: flat screen TV, plasma TV and LCD TV.

Keyword 1: Flat Screen TV; Keyword 2: Plasma TV; Keyword 3: LCD TV.

This company is using cost per conversion to make all of their keyword decisions. This metric is also known as the cost per acquisition or CPA. This is a very common metric that a lot of advertisers use today. The decision logic is based on the following question: "How much money do I spend on a particular keyword to generate a sale". The logical conclusion is that the best keyword is the one that costs the least to produce a sale.

In this case, the advertisers know a little bit about their business. They know that, on average, if they spend over $300 to generate a sale, they are not profitable. Therefore, when looking at their keyword performance, they look at any keyword that has a CPA above $300 and attempt to eliminate it. If we ask them to pick their best keyword of the three here, they would certainly choose (as I am sure you all would agree) Flat Screen TV as their best keyword. Why?

Because it converts for less than $300, and it is the cheapest converting keyword they have.

If I was able to show this advertiser just a little more information, their opinion could change. Let's say I was able to show them the actual sales price the keyword was able to generate. Would it change the assumption of what was their best keyword?

Based on the assumptions listed in the second example above, the keyword they thought was best is now only generating a $1000 sale each time it converts. Whereas, the other two keywords, which they chose to eliminate, generate sales of three times the value. Knowing these two keywords actually drive a much higher sales price, it completely changes the decision logic where Plasma TV, with this added insight, now appears to be a better keyword. Yes, it has a higher cost per conversion than they thought they could allow, but that was before they knew it drove a sales price three times what they were accustomed to receiving.

While Plasma TV now appears to be the best keyword, the advertiser is still not making decisions based on complete information. With one more piece of critical information, they would be able to make the perfect decision. What's missing here is actually knowing which exact product was sold and its associated margin. Simply understanding that I brought $3000 in revenue is nice, and it can be helpful, but if you are like most retailers out there, you are selling products that have different margins, and that is a key factor in determining the ultimate profitability generated by each keyword, online ad and campaign.

Based on the product and margin information from the third example listed above, we get an entirely different picture once again. The keyword that initially appeared to be the worst, LCD TV, because it has a high cost per conversion and appeared to be the second best option because it had the same sales price as Plasma TV, now is proven to be the best keyword. Why? The answer is simple: LCD TV has a higher margin than the other 2 products, which more than offsets its higher CPA.

By adopting the frequently used, industry-standard CPA approach, the keyword that was thought to best for their business turned out to be unprofitable and the worst keyword for their business. In turn, the keyword that was initially thought to be the worst for their business ended up the most profitable.

This advertiser would have eliminated their two most profitable keywords, and they would have funneled all of their ad dollars to the one keyword that on the surface level looked like it was the best, as measured my cost per conversion, but, in reality, was losing $95 for their business every time it generated a sale.
This leads us to the fundamental premise of this article - many industry-accepted practices for measuring online advertising effectiveness are flawed and can lead to sub-optimal, if not unprofitable, online investments.

Sophisticated marketers use profit as their guiding metric because it is the only metric that, in all business and Internet advertising, does not lie. It does not lead to the question: "Yeah but, could it mean this or could it mean that?" When you understand an ads profitability, you have the final answer.
About the Author
Adam is the Chief Revenue Office at ClearSaleing. He is a seasoned sales manager starting insides sales teams at Google and Actuate Software. Adam holds a B.S.B.A. in Marketing from The Ohio State University. ClearSaleing
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