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In the ever-evolving landscape of performance marketing, staying ahead of the curve is essential. Google Ads, the powerhouse of online advertising, continues to undergo significant changes, including AI-driven features benefiting advertisers and end-users. One of the most exciting developments is Google's recent announcement of a new reporting column that calculates profit based on the cost of goods sold in the feed.

Code3 Search Strategists are anticipating that within the next year, Google will unveil a new smart bidding strategy focused on optimizing campaigns toward a target profit margin. Before this time comes, it’s important to be ahead of the curve and have the knowledge to fully lean into this strategy. We’re here to help with insights and tips marketers need to execute immediately. 

Why Bidding to Profit is Superior to Bidding to ROAS

While Return on Ad Spend (ROAS) has long been a reliable metric for many advertisers, there comes a point in most businesses' growth journey when maximizing profits becomes the primary goal. This is because profit-centered strategies take into account not only advertising spend but also other important metrics like cost of goods sold (COGS), operating expenses, and the lifetime value of customers. This holistic approach allows businesses to make more informed decisions about their advertising investments.

Additionally, ROAS-focused brands can often focus too heavily on increases in sales at the expense of long-term sustainability. For example, if the CPA of each new customer is high, then optimizing for the highest number of sales can lead to lower profit margins, even if revenue per order or average order value (AOV) is high.

In contrast, bidding to profit offers an approach that focuses on the actual profitability of advertising efforts, rather than merely driving sales. It’s a strategy that can have a major positive impact on your brand and Google Ads strategy, so let's delve into the world of value-based bidding.

Value-Based Bidding: The Basics

Value-Based Bidding is the cornerstone of a profit-centric advertising strategy. Unlike traditional bidding strategies that concentrate solely on the quantity of conversions or even ROAS-focused strategies that optimize revenue, value-based bidding emphasizes the value of conversions. This means that your ad campaigns will prioritize quality over quantity every time.

Important tip: Don’t confuse this conversion value metric with revenue, even though your Google Ads account may be calculating these in the same way.

Conversion value doesn't always have to translate to revenue generated from a sale; it can instead be the sum of the value you, the advertiser, attribute to different conversion actions. In other words, the true benefit of value-based bidding lies in assigning different values to different conversion actions. For instance, in the case of a lead generation client, a Marketing Qualified Lead (MQL) might carry a higher value than a standard form fill, but not as high as a closed deal. In Google Ads, the values for these conversion actions might look like this:

• Form Fill: 10
• Marketing Qualified Lead: 500
  
• Closed Deal or Sale: 1500
  
• High Value Sale: 2000

Notice how these values aren’t currency. This can help your team to avoid thinking of this as revenue.

Nevertheless, sometimes advertisers can be hesitant to alter the values of their conversion events, and understandably so.  Make sure that you’re recording revenue in Google Ads, and not only using the conversion value column to track the proceeds from your campaign. This will ensure that you have a metric in the UI that correlates to the price the customer paid for their order. After this, take the first step into value-based bidding by creating new conversion events for high-value milestones such as:

• When a customer converts for a product category that tends to have a higher lifetime value (ie subscriptions or products that lend themselves more to repeat buys). More on that below.
• When a user becomes a repeat customer
• When a customer becomes high value in some other way (email signups, high number of referrals, etc.)

Incorporating Lifetime Value (LTV) into Your Profit-Centered Strategy

Ideally, when a sale occurs from a paid channel, that customer will continue to convert organically. This makes the cost of paid media much lower in relation to the revenue generated after that first touch, therefore generating higher profits. Brands that measure three important metrics are already on the path to be able to optimize for LTV. These include:  

1. How often repeat purchases occur
2. The lifetime value of the user
3. What types of purchases are most likely to lead to a higher lifetime value

Feed Updates - Cost of Goods Sold (COGS)

To effectively bid for profit, adding the cost of goods sold (COGS) as a column in your Merchant Center feed is important, particularly for Performance Max. Google Ads will use this information to calculate your gross profit. If your brand has a large inventory, this can of course be a challenging task.

But don’t let perfection hinder progress here. If the goal is simply to improve profit, consider inputting your average or median cost of goods by product type or (or other relevant category) in your feed. This can be done with a feed rule in Google Merchant Center, and you can exclude any outliers that might skew the data.

Segmenting Performance Max Campaigns by Profit

For businesses aiming to implement profit-centric strategies, optimizing Performance Max campaigns is crucial. If you've added COGS to your feed, you're well-prepared for a potential Google bid strategy centered around profit bidding. No further segmentation might be necessary.

In cases where adding the cost of goods sold in your product feed is not feasible or possible and you want to start optimizing for profit immediately, consider splitting your inventory into 2-3 campaigns categorized by profit margin. This often involves creating high profit, medium profit, and low-profit campaigns. Allocate your budget more towards the higher profit campaign to gradually boost your overall profit margins.

Avoid Over-Segmentation

Google advises against over-segmenting your inventory into too many campaigns, but hasn’t provided any guidance on what over-segmentation means. Ideally, Code3 Search Strategists suggest our clients optimize around profit and not segment their inventory beyond high, medium, and low-profit categories. Further segmentation can be done on the asset group level, leveraging Google's new asset group reporting feature to monitor performance.

In the ever-evolving world of Google Ads, bidding to profit is the future. By understanding the value of your conversions with value-based bidding, incorporating COGS data, and optimizing for lifetime value, you'll be well-prepared to embrace the impending Google bid strategy focused on improving profits for your brand. Not sure where to begin? Contact us today to learn more about how we can help.