The majority of businesses today are doing some form of online advertising – whether that be small boosts on Facebook or Instagram, search ads via Google Ads, product ads on Amazon, or display remarketing on one of the many ad networks out there. But how many of those campaigns are actually delivering results for those companies? The answer, sadly, is far too few — most advertisers don’t realize a true profit, even in cases where the Return on Ad Spend (ROAS) is greater than 1.
What Does Profitability Mean?
The vast majority of marketers have no idea what profitability means – which tends to make running profitable campaigns difficult (and knowing if in-market campaigns are profitable virtually impossible). So, let’s start with a shared definition: a profitable campaign is one that provides a financial benefit, after accounting for all costs related to the production, implementation and management of it. There’s a lot happening there, so let’s break this down.
There are five factors to consider when assessing the profitability of an advertising or marketing campaign (or really, any investment):
- Gross Revenue: the amount received from your customer for the purchase of a given item or service.
- Cost of Goods Sold (“CoGS”): the amount it costs your organization/company to produce the item or provide the service (i.e. if you outsource web development services to a third party who charges you $2,000 per website, your CoGS on a website project would be at least $2,000).
- Advertising Costs: this can be (technically) included within CoGS, but for our purposes, it is usually kept separate. This is the amount of money paid to the platforms or vendors to run your campaigns.
- Overhead & Administrative: Most agencies charge a fee (whether that be a percentage of media spend, or a flat fee, or a monthly retainer) for campaign services. In many cases, this isn’t directly attributable to a single campaign or product sale, so it goes into the “overhead” bucket. Ditto for company resources allocated to manage the marketing agency, rent for storefronts, salaries for sales teams, expenses paid to printing vendors to produce shiny new brochures, etc.
- Profit Margin: finally, there’s the amount of money the company wants to make – after (1)-(4) are taken into account, on each sale. Remember: advertising is a risk to a business — so there must be a commensurate reward in order to justify the capital outlays required. It makes little sense to spend thousands of dollars just to break even (or worse).
Most platforms, and by extension most marketers, only focus on (1) and (3) from the above and ignore the rest, which is how we arrived at the ROAS-obsessed place most agencies/marketers/platforms are in (for the uninitiated, ROAS is calculated through the following equation: (Revenue) / (Advertising Costs). That’s it.
And as you might imagine, what constitutes a profitable ROAS can vary wildly depending on your industry, product type, sales volume, etc. Where this goes from annoying to nefarious is the (related) idea, peddled by platforms and far too many agencies, that any ROAS > 1 is “profitable.” Nothing could be farther from the truth.
Doing Your Own Math
The ROAS problem is illustrative of a larger issue plaguing the advertising industry: an inability of practitioners to do their own math and a corresponding reliance on platforms to tell marketers/brands what’s good and what’s working (which they’re ill-equipped and poorly incented to do). The first step in addressing this issue is for marketers to do their own math.
Working Backwards to Understand Profitability
My recommended approach to this is to work backwards, starting with the desired profit margin on a given product/service/sale — then working backwards to determine the appropriate sales price and acceptable advertising costs.
To illustrate this concept, consider a company selling a product (i.e. chairs) for a se price ($150 per unit) via digital ads. Let’s further assume that the client requires at least a 20% net profit per transaction, that each chair costs $50 to produce and ship in the US, overhead (excluding the agency) is $10 per unit, and the agency’s fee is $5,000 per month. How do we figure out when the company’s digital marketing efforts are truly profitable?
- Start by calculating the desired profit: $150/unit * 20% = $30.00. Subtracting the top-line revenue ($150) from the profit ($30) leaves $120 for overhead, COGS, advertising & agency fees.
- Remove COGS + Overhead: We know our COGS are $50/unit and overhead is $10/unit, totaling $60/unit. Once again, we subtract $60 (overhead + COGS) from $120 (#1 above), leaving $60 for advertising costs + agency fees. Note: for simplicity, I’ve ignored a bunch of other costs that could fall into this bucket — from holding/warehousing costs, return costs, defective product costs, financing/interest expenses, insurance costs, etc. Depending on your business/industry, these may be material, and a conversation with a competent person in finance/accounting should be able to provide you with the numbers you need.
- Estimated Cost Per Sale (CAC): the final piece of this involves determining your estimated Customer Acquisition Cost (CAC). Let’s assume, based on this client’s historical data, the CAC is $20-$40 in advertising costs (again, not agency fees) to sell a unit. At $60/margin per unit (from 2), that requires the campaign to drive between 125 units and 250 units sold per month in order to meet the profitability targets ($5000 agency fee / ($60-(CAC))).
- The Relationship Between ROAS, Sales Volume & Profit: this is where things get interesting (and illustrates why ROAS isn’t everything): let’s imagine that the campaign drives 50 unit sales, with a CAC of $20/unit. Here’s how that breaks down:
- Total Revenue: $150*50 = $7,500
- (Less) Ad Costs: $7,500 – ($20*50) = $6,500
- ROAS (Revenue/Ad Costs): $7,500/$1,000 = 7.5
- (Less) Agency Fees: $6,500 – $5,000 = $1,500
- (Less) COGS + Overhead: $1,500 – ($60*50) = ($1,500)
So, in this example, even with a ROAS of 7.5 (which most agencies would say is fantastic), the campaign is a net loss – the company actually LOST $1,500 selling those 50 chairs, or about $30 per chair. Yikes.
Now, imagine we have a different campaign. This one drives 500 chair sales with a CAC of $40/chair. That’s significantly less profitable on a per-unit basis, but what about overall?
- Total Revenue: $150*500 = $75,000
- (Less) Ad Costs: $7,500 – ($40*500) = $55,000
- ROAS (Revenue/Ad Costs): $75,000/$20,000 = 3.75
- (Less) Agency Fees: $55,000 – $5,000 = $50,000
- (Less) COGS + Overhead: $50,000 – ($60*500) = $20,000
- (Less) Profit Requirements: $20,000 – ($30*500) = $5,000
- Surplus Profit: $5,000, or $10/unit sold
In this second scenario, the ROAS was significantly lower than the first (3.75 vs. 7.50), but the campaign as a whole was quite profitable – not only did it meet the company’s profitability requirements, it did so with $5,000 to spare. This illustrates why ROAS isn’t the end-all, be-all of campaign profitability — it’s just one (extremely flawed) metric.
While this is a B2C example using a durable good (i.e. a chair), the same principles apply to every other type of business (the specific types of costs, profitability targets, overhead expenses, etc. will change, but the underlying principles remain the same).
How Does This Tie Into PPC Campaigns?
As the above example illustrates, Pay-Per-Click (PPC) campaigns – if executed well – can one of the most effective ways to grow a business profitably; they can also be one of the easiest ways to lose thousands or even millions of dollars. If your goal is to be in the former category and avoid the latter category, the first step is doing your own math (as detailed above).
Once you have the basics done, my preferred next step is to create a budget model that projects a range of outcomes, informed by the priors we have (previous campaign data, platform/advertising costs, etc.) – this way I know the CAC ceiling I can’t exceed if the campaign is driving sales of 100 units ($10) vs. 1,000 units ($55). It will also tell me the volume of no return – i.e. the volume where the campaign is a loser no matter how low the CAC goes. In the chair example above, that’s right around 55 chairs – it’s mathematically impossible for the company to turn a profit at 55 units sold, even at a CAC of $0.00.
In order to check your minimum volume, reduce profit and CAC to $0, then divide your total fixed costs (in this case, the agency fee) by the margin per unit (Revenue – COGS + OH): $5,000 in agency costs / ($150 (Revenue) – $60 (COGS + OH) – $0 (CAC) – $0 (Profit)) = 55.5. This gives the minimum volume required to turn a profit each month — anything less, no matter how good, is guaranteed to be a net loss.
Did That, Know Numbers, What’s Next?
Once you know your numbers, the next step is putting in place structure, controls and data pipelines to maximize your chances of staying within the parameters you’ve identified above – as well as providing you (or your client) with the information necessary to make an informed decision about whether to continue to advertise or pull the plug.
In general, most PPC campaigns are structured around five core factors – each containing many sub-factors/elements. If you’ve ever attended one of my talks or classes, you’ll often hear me refer to being “brilliant at the basics” — and in the digital advertising world, that comes down to excellence in each of these five areas:
- Account + Campaign Structure – are your campaigns logically + properly organized? Have you created topical ad groups and organized them coherently within your campaign structure? Are the technical settings of your campaigns (bidding strategy, geo-targets, time of day/day of week, language, auto-apply settings, rules/scripts, etc.) appropriate for your business? All this boils down to a core question: did you put appropriate guard rails in place to prevent the Google/Bing machine from running amok?
- Exclusions – as platforms such as Google and Facebook have slowly, but steadily, expanded its control over what terms your ads show for, the relative power of exclusions has increased. That has led us to a point where exclusions – your negative keywords, excluded locations, excluded audiences – are MORE important than positive targeting.
- Positive Targeting – keywords are the “go-to” lever that PPCers love to pull, but it’s important to remember that keywords are just one lever. There are others (i.e. Audiences) that can be just as powerful, if not more powerful. Successful PPC campaigns integrate different keyword match types with different audiences to hone in on their target audience, alongside robust negatives to ensure the machines don’t go crazy.
- Creative – The first three things we’ve discussed are – fundamentally – about ensuring Google shows your ad to the right people at the right time; but what happens next? This is where creative is king — do you stand out on the SERP? Is it relevant and valuable to the user querying a phrase you’ve worked so diligently to reach? Many brands have brilliant PPC campaign strategies, but mediocre-at-best creative — and the results are just as dismal as those groups with poor strategy and clever creative. You need both to succeed.
- Data – The new adage in digital marketing is “the best data usually wins” — and it applies here. It’s no longer good enough to track basic campaign metrics (impressions, clicks, CTR, CPC, CPM, etc.) or even outcome-based metrics (conversions, events, calls, lead forms, etc.). This is now table stakes – and winning means going deeper and building more informed, robust and actionable data pipelines. That means capturing GCLID (or MSCLID, or FBCLID) everywhere, passing it to CRMs, layering it with additional customer, product and/or business data, then passing it back to the platforms. Data capture, transfer and passback is critical to PPC success – yet far too many marketers overlook it (at their own peril).
Often, as we’re assessing campaigns + performance, we’ll find issues in all five of these areas — and those issues range from the minor to the financially catastrophic. But what’s constant is the lack of attention to (a) profitability and (b) seemingly-minor campaign details by PPC managers/agencies, along with the trust extended to platforms. When these elements are combined, the end result is almost never positive for the brand or client (internal or external).
One of the most important things to remember, throughout this entire process, is:
The Platform’s Goals Are Not Your Goals. Your Goals Are Not The Platform’s.
Google doesn’t care about your business, or the profitability of your campaigns, or your customers; Google cares about Google (and, in fairness, you probably don’t care about Google’s business or bottom-line much, either). Ditto for Facebook, Twitter, LinkedIn, Microsoft, Comcast, and everyone else.
The new platforms, features and functionality these platforms roll out are not always for your benefit, but usually for their own — each represents a new potential revenue stream or an efficiency enhancement to an existing revenue stream. My approach to each new feature offered by Google (or Facebook, or Microsoft, or Twitter, or any other platform) is best summarized as: “try before you buy.”
If you have a dedicated test budget, use that first; if you don’t, create one. Set aside 20% of your ad spend for ongoing testing – with zero expectation of profitability. This is your R&D budget; the goal is to test these new features, tactics and platforms to determine which ones have the potential to be viable for your business/organization. This, of course, requires you to (a) do your own math up-front and (b) fix the issues with your existing campaigns.
If (like many organizations), you have an agency or freelancer helping with your digital advertising, and that current partner isn’t asking questions about profitability, cost structures and the like, it’s a major red flag — especially if they are then reporting on ROI or ROAS or profitability. To put it bluntly: there is no way for anyone to coherently report on profitability without understanding your business and the underlying cost structures.
The Secret To Profitable PPC Campaigns
When I’m teaching classes, doing corporate workshops or working with clients, I’m often asked what the “secret” is to a profitable PPC campaign — and my answer is always the same: profitable campaigns come down to three things:
- Doing your own math
- Being brilliant at the basics for each platform
- Knowing when to say, “No more”
The first two of these I’ve covered extensively above; the third one, not so much. The one constant I’ve observed throughout my years working in this industry is change. Platforms change. Customers change. Products change. Competitors change. In the face of such dynamism, it’s a fool’s errand to expect consistent results. But far too often, I work with clients who have the same campaigns running on the same platforms for years – because that’s what’s in the budget or that’s what’s always done, or that’s what the owner wants, or whatever. In some cases, properly managed (and regularly-updated) campaigns can perform brilliantly well, aging like a fine wine. In most others, the campaign performance (despite the best intentions) degrades over time, aging more like milk than wine. And in the face of that objectively awful performance, far too many brands are content to pour money in based on the history of the platform, or agency, or campaign.
Spoiler Alert: it (almost) never works
That’s where point #3 above comes in: be clear with yourself when you’ll pull the plug before you spend the first dollar. Commit to it. Write it down, if you must. And then hold yourself accountable to that commitment with the same rigor that you hold your partners and staff to their obligations. Be ruthless in cutting what doesn’t work. Since I was a child, my grandfather instilled in me the famous quote from Bernard Baruch: “No one ever lost money taking a profit.” It’s a philosophy I try to live by every day – and often, that means saying good-bye to formerly-excellent campaigns that have outlived their profitability.
That is the true secret to a profitable PPC campaign: knowing when to turn it off.