Google Ads Gross Profit Optimization: A Complete Guide

In the competitive world of e-commerce, profit optimization is not just a buzzword; it's a crucial strategy for businesses seeking sustainable growth and financial success. By aligning your advertising efforts with your overall business objectives and employing intelligent profit optimization techniques, you can maximize returns, enhance profitability, and establish a strong foundation for long-term growth.

Aligning Strategy and KPIs

A successful profit optimization strategy starts with defining clear goals and aligning your key performance indicators (KPIs) with your overall business strategy. Whether your primary focus is growth or profitability, profit optimization provides a powerful tool to achieve both.

Growth vs. Maximizing Incremental Profits

Growth-oriented strategies typically focus on maximizing revenue, aiming to increase sales and expand market reach. While this approach drives overall growth, it does so without control over profitability..

On the other hand, maximizing incremental profits takes a more nuanced approach. By analyzing cost-profit relationships, this strategy aims to optimize advertising investments to generate the highest possible gross profits after advertising spend. This approach not only enhances profitability but also enables you to grow your business more sustainably, ensuring that each investment contributes to long-term financial health.

From Fixed to Output-Based Media Budgets

Traditional revenue optimization strategies often rely on fixed media budgets, limiting the ability to allocate resources effectively based on profit potential. Profit optimization, however, introduces the concept of output-based budgets, allowing you to invest more as long as each additional euro invested in advertising spend increases the gross profits in excess of the additional euro invested.

This flexibility empowers you to allocate resources more strategically, targeting high-margin products and segments while carefully managing costs for lower-margin items. This approach optimizes advertising spend, maximizing profitability and driving overall business growth.

Layering Tactics for Unique Challenges

Every business faces unique challenges and opportunities that require a tailored approach. For instance, you may need to prioritize products with excess stock, strategically important items, or those that contribute to customer retention.

Profit optimization strategies can be adapted to address these specific needs. You can apply different constraints or strategies for these segments, ensuring that your advertising efforts align with the unique characteristics of each product or customer group.

Gaining Stakeholder Buy-in

Effective profit optimization requires buy-in across your organization. It's crucial to align your sales, marketing, and finance teams around the new strategy and ensure that everyone understands the KPIs and targets. This collaborative approach fosters shared goals and drives a unified effort towards optimizing profitability.

Unlocking Profitability: A Journey Worth Taking

The journey towards profit optimization may seem challenging at first, but the rewards are immense. By embracing this strategic approach, you can transform your e-commerce business into a profit powerhouse, paving the way for long-term sustainable growth and financial success. The average uplift we have seen for our customers are showcased below.

Stay Tuned for More Insights and Practical Guidance

Setting new KPIs, constraints, tactics, and targets can be a daunting task. We're committed to providing you with comprehensive resources to help you navigate this process effectively. In the coming weeks and months, we'll be publishing a series of articles that delve into best practices and provide practical guidance for optimizing your profit optimization strategy.

In this article, we'll dive into the strategies and techniques for maximizing your Gross Profit after advertising spend (GP3) within Google Ads. Maximizing GP3 involves identifying the point where your incremental profit (GP2) gains equals the incremental advertising cost increase.

This is the critical juncture where profits begin to decline, even as revenue continues to rise, following the traditional law of diminishing returns.

The overarching goal is to maintain a balance atop the GP3 curve, continuously adjusting ROAS targets to optimize profitability. However, this optimal point varies across campaigns and is constantly shifting due to external factors like seasonality, competition, pricing dynamics, product assortment changes, and more.

To effectively navigate this dynamic landscape, a well-structured process for adjusting ROAS targets is essential.

Smart Bid Simulations

Google's sophisticated simulations for various ROAS (Return on Ad Spend) or GP2 (Gross profit before advertising cost) levels can provide valuable insights. However, these simulations alone don't reveal the optimal ROAS level for maximizing GP3.

To determine this optimal level, you need to calculate the incremental cost and conversion value changes between each "Target ROAS" level. This can be a time-consuming and error-prone process when done manually.

To address this challenge, we've developed a GP3 simulator script that gathers data points from each campaign and summarizes it for easy overview.

Our simulator provides a clear overview of each campaign's current ROAS level and the predicted optimal level for maximized GP3. With a single click, you can obtain refreshed simulations to guide your daily bid or ROAS adjustments.

No limited budgets

When pursuing a maximize incremental profits strategy, it's crucial to ensure that no campaigns are constrained by budget limitations. If campaigns are budget-limited, decreasing ROAS targets can actually harm performance rather than improve it.

Data Validation

Accurate and precise data, including accurate profit calculations, is paramount when optimizing GP3 in Google Ads. Overestimating profits will lead to adjustments beyond the optimal GP3 level, while underestimating profits will hinder achieving the optimal point.

Therefore, ensure that your profit data is aligned with your actual profit structure.

Campaigns / Sale

Occasionally, you may have access to information that is not captured by Google's machine learning simulator. This could include planned price changes, sales campaigns, new product launches, assortment changes, and more.

Consider these factors when deciding whether to implement the suggested ROAS level. For instance, if you're running a significant sale for seven days, the simulator might recommend decreasing ROAS for increased profitability, but you know the sale will end soon.

In such cases, consider waiting for a few days for more accurate data before running the simulation again.

Measurement & tracking

In order to work with maximizing profits it is very important to have the recommended tracking and measurement in place. As a tracking method, utilize Google Ads conversion tracking with enhanced conversions. And this conversion action should be populated with profits instead of revenue. It is also important that the data freshness is as real time as possible which is why backfills or conversion uploads are not recommended. The transaction should be sent to the Google ads platform in real time for the best possible outcome. Also remember to use Google’s data-drive attribution model on any conversion events used in your campaigns.

Align your strategy

While ROAS is a valuable metric, it's essential to align your GP3 optimization strategy with your overall business objectives. E-commerce businesses often aim for specific ROAS targets. However, when striving to maximize profits, ROAS takes a secondary role.

Remember, the primary goal is to maximize profits in absolute terms, regardless of the ROAS level.

Get access to the MAX GP3 simulator

Book a demo of our platform to gain access to our GP3 Simulator, a powerful tool that helps you analyze your campaign data and identify the optimal ROAS level for each campaign. With this tool, you can make informed decisions that maximize profits while aligning with your overall business strategy.

This article reveals remarkable results, demonstrating the transformative power of data-driven decision-making through profit optimization:

Today, to no one's surprise, we see a rapid shift in strategies where e-commerce businesses are moving away from focusing purely on growth towards focusing on profitability. However, with profit optimization, most businesses can achieve both. With this article, we want to demonstrate the transformative power of profit optimization in driving e-commerce business success. We have conducted a comprehensive study using advanced statistical analysis (causal impact) to pinpoint the impact of profit optimization for our customers, and the results are quite astonishing. 

These remarkable outcomes underscore the ability of profit optimization to unlock untapped potential and elevate businesses to new heights of financial success. For more business-specific case studies, read our success stories here.

The Cornerstones of Profit Optimization

When we refer to profit optimization, we refer to measurement and data validation that delivers actionable insights and reporting upon which we can establish a strategy and begin with profit bidding.

To achieve the desired results, all three pillars need to be in place, along with  KPIs (key performance indicators) that align with the strategy they are working towards.

Implementing Profit Optimization with Seamless Simplicity

While the concept of profit optimization is widely recognized, its implementation can be a daunting task for many e-commerce businesses. The complexity and cost of building and maintaining robust technology infrastructure often present significant barriers.

Kuvio.io deftly addresses this challenge with our user-friendly and comprehensive solution. We eliminate the need for businesses to develop and maintain their own complex technology stack, seamlessly integrating with existing e-commerce systems for effortless measurement, insights, and activation.

Join the Profit Optimization Revolution

Join a growing community of successful businesses leveraging Profit Optimization to revolutionize their media operations and unlock their true potential. We have a series of articles coming out covering Profit Optimization, Subscribe to our newsletter and get exclusive early access to our groundbreaking series.

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*GP2: Revenue -  (COGS + Pick and Pack + Payment Fees + Logistics) 

*GP3: Revenue - (COGS + Pick and Pack + Payment Fees + Logistics) - Ad Cost

*Revenue: Transaction revenue excluding VAT

MarTech solutions company Kuvio.io announces the appointment of Google alumni Freddie Jansson as their new COO. The organization offers a platform for profit optimization and real-time reporting connected to e-commerce.

Freddie Jansson most recently held the position of Automation Lead at Google.

"It's incredibly exciting to announce the addition of Freddie to the team. His extensive experience with Google and paid marketing will be of great value to Kuvio. As a seasoned professional with a strong background in e-commerce across Europe, his expertise will be invaluable in driving innovation and growth for our clients," said CTO and co-founder Henrik Segersven. "We look forward to the positive impact Freddie will have on Kuvio as we continue to support our clients in excelling across all of their online sales channels."

Freddie Jansson joins an already diverse and experienced team. His expertise encompasses skills he has acquired over nearly a decade in automated marketing.

“I couldn’t be more excited to join Kuvio at a time when profitability is the main strategic topic for many retailers”, says Freddie Jansson about the new role. “I’ve seen Kuvio evolve as a leading platform that reduces the complexity of data integrations and removes the technical barriers to profit optimization.”

Kuvio allows e-commerce businesses to calculate the business value per order in real-time, enabling companies to optimize their ad spend for profitability, simplifying sustainable long-term growth.

In the second quarter of 2022, a majority stake in the company was acquired by The North Alliance (NoA), a leading Nordic agency network and investor within the marketing and e-commerce industry.

Most digital advertising sales are today determined by an auction, where all those who are interested in having their ads shown for a specific keyword or a specific audience place a bid, and then the highest bidder wins. This means that if you rely on digital advertising, bid management and optimisation is key to achieving the highest possible profit. 

In the early years of digital marketing, being a successful digital marketer was synonymous with being good at bid management. On Google, Bids were set manually using Manual CPC, and you continuously tested and adjusted bids to try and find the sweet spot. In 2010 Google launched Enhanced CPC, which gave Google the ability to adjust your manually placed bids to a certain extent based on which customers it deems most likely to convert. This was the first step towards automated bidding strategies, and now automated bidding strategies such as Target CPA and Target ROAS are the norm. These strategies were originally mostly geared towards small businesses to make advertising effortless, but are more and more being used by agencies thanks to their superior performance compared to manual bidding. 

The issue with Target CPA and Target ROAS is that neither of them take into account the business value that actually counts. Target CPA does not differentiate between a sale worth 5€ and a sale worth 500€, and Target ROAS does not differentiate between a sale with a 10% profit margin and a sale with a 70% profit margin. Advertisers are becoming increasingly wary of  this issue, where they have difficulty with bidding towards the right customers and keeping track of which campaigns are actually generating profit for the business. Using Kuvio, advertisers are able to get the benefit from using automated bidding strategies, while at the same time targeting customers who generate the most bottom-line profit to the business. Additionally, they are able to track which campaigns are the most profitable, and adjust their advertising strategy accordingly. This leads to higher average gross profit while simultaneously lowering their advertising spend. 

The next step from optimising bids towards profit, is optimising them towards customer lifetime value (CLV) and new customer acquisition. This way you can prioritise sales that are expected to lead not only to highest profit, but to highest lifetime profit. In practice, in this case you automatically prioritise new customers, as well as products that have a high number of repeat purchases. CLV bidding will be available on Kuvio starting Q1 2022. 

Book a demo to learn more about how to get the most out of your advertising and how Kuvio can supercharge your business. 

In the graphic to the right, you see a rather typical business case that many of our customers face. The two orders are quite similar in revenue, but when you look at the cost-side there are significant differences. The two costs worth looking at more closely in this example are the cost of goods sold as well as customer service & returns. 

Cost of goods sold is the price that you as a company pay for the product that you are selling. This is likely the most common cost that determines the gross profit that you receive from a sale. In this example, Order 1 has a higher cost of goods sold. This is certainly partially offset by a higher sales price, but the difference in Gross Profit 1 is still smaller than the difference in revenue. 

Further, in this example, there is a significant difference in customer service & returns between two orders. This can be for a number of reasons, for instance that the Order 1 contains many pairs of the same shoe in different sizes, where it is natural that the pairs that do not fit will be returned. 

When bidding with a revenue target, you would in this example place higher bids on Order 1 than Order 2. However, when you subtract all the costs associated with the sale, you can see that Order 2 is actually much more profitable to the business, with a profit before marketing costs of 310€ rather than 180€. Thus, from a business value perspective you are much better off with placing a higher bid on Order 2 instead. 

By using Kuvio, you can make a custom profit calculation which removes cost of goods sold, expected returns costs, and other costs from the cart revenue, which results in an accurate real-time profit metric which you can then feed to the marketing platform of your choice. For instance, you can then use Google’s smart bidding algorithm in the same way that you have previously done for ROAS, but now asking it to find you the most profitable customers. By using Kuvio, you would thus place a higher bid on Order 2. 

To summarise, by bidding on revenue, you are sub-optimising your business - and that is why you should care about profit bidding. 

Book a Demo with the Kuvio team for more information on profit bidding and what it can do for your business.

Parfym partnered up with Kuvio with one strategy in mind. Profits and growth. An equation that rarely adds up – but shifting from the traditional way of optimizing, reporting, and analyzing the top-line revenue to profits was a game changer which then shifted Parfym’s development towards profitable growth. 

Advanced reporting on profits across the entire channel and marketing mix, enabled us to shift budgets accordingly. This, alongside real-time profit optimization in Google ads, allowed us to focus on maximizing incremental profits after advertising spend instead of maximizing revenue with a given return on ad spend. Parfym achieved a 303% incremental uplift in profit after advertising spend with the help of Kuvio.io

Rajala Pro Shop changed to optimising their advertising against profit rather than revenue, and increased their average gross profit while simultaneously decreasing their advertising spend for the same amount of revenue. 

Rajala Pro Shop operates within the camera retail industry, where much business value is driven by kickbacks from suppliers based on purchasing prices. As top-line revenue does not account for kickbacks, this business value was difficult if not impossible to effectively take into consideration when using revenue target-based bidding. Further, as Rajala sells both new and used equipment, the jurisdictions in which they operate impose different VAT percentages across the product range. This is not taken into account either when only using total revenue as the signal. 

Using Kuvio, they set up a custom profit calculation that took into account both the kickback structure and the different VATs across the product range, which enabled detailed real-time per-order profit calculations. Feeding this signal into their marketing platforms, they are able to optimise on the business value that actually matters to them – profit.

Kitchentime, who uses Bluebird Media as their digital marketing partner, had – like many other e-commerce businesses – difficulty with attaining profitable results from Google Ads. Kitchentime focused on total revenue, but when they switched their bidding strategies to maximise total profit, they were able to increase their gross profit by 71% compared to the same period the previous year, after deducting marketing costs.

“ – The mistake that many e-commerce businesses make is that they optimise their bids to maximise revenue or transactions, but in order to achieve sustainable growth they should be optimising for profitability. Thanks to Kuvio you can send profit as a signal to bidding algorithms to maximise profitability in absolute terms rather than revenue. ” - Patrik Segersven, Head of Paid Search & Analytics, Bluebird Media.

Kuvio only acted as a facilitator for Google’s smart bidding algorithms to make better decisions. Kitchentime previously used ROAS (Return On Ad Spend) bidding, which means that Google adjusts bids to maximise revenue given a certain ROAS target. This likely means that Google favours selling products that are as expensive as possible and that have the highest possible sales volumes. As many e-commerce businesses know, however, is that it is not necessarily the most expensive and certainly not the products that have the highest sales volumes that are the most profitable for the business. By feeding Google’s smart bidding algorithm profit rather than revenue, we force Google to find the most profitable sales rather than those that have the highest revenue.

Profit Optimization - Glossary and definitions

Profit generally refers to the financial gain generated when revenues exceed costs and expenses. The definition can vary depending on the different costs that are used to calculate the profit. Gross profit is commonly divided into sub segments among ecom retailers profits to define profit at different levels of the profit and loss statement (P&L).

Gross Profit 1 (GP1)

Gross Profit 1 is the difference between Revenues (excluding VAT) and the Cost of Goods Sold (COGS). It represents the most basic profitability of the core business activities; what you sell products for vs what you bought them for. 

Formula: Revenue - COGS

Gross Profit 2 (GP2)

Gross Profit 2 does not only take into account the manufacturing or buying costs of a product, but also other costs that are related to selling the product. These costs can  be Shipping costs, Payment fees, pick & pack costs at the warehouse, return costs or other business specific costs. 

Formula: GP1 - Shipping costs - Payment fee’s - Pick & Pack costs - Return costs - Other costs 

Gross Profit 3 (GP3)

Gross Profit 3 is all variable costs accounted for in GP1 and GP2 as well as the marketing cost. A mature company that wants to maximize its profitability often uses GP3 as the maximization target when optimizing marketing campaigns. On the contrary, if the GP3 is negative, there is no funds left to cover fixed costs further down in the P&L statement - which is not a long-term sustainable state of a business. 

Formula: GP2 - Marketing costs

Net profit

Net profit represents what a company earns after deducting all costs, including salaries, operating costs, interest, and tax expenses. This is what is also called bottom line profits. 

Cost of Goods Sold (COGS)

COGS, or Cost of Goods Sold is the price a retailer bought or manufactured the product for. It includes all direct costs that are associated with producing the product. 

Gross Margin (GM)

Gross Margin represents the relationship between Revenues and Profit. In contrast to Gross Profit, which is stated in absolute monetary terms, Gross Margin is a relative number stated as a percentage. 

Gross Margin 1 (GM1%)

Gross Margin 1 is defined as Gross Profit 1 in relation to Revenues.  It answers the question of how much of the revenue is left after deducting the cost of goods sold (COGS). 

Formula: GP1 / Revenue

Gross Margin 2 (GM2%)

Gross Margin 2 is the percentage of revenues left after accounting for COGS and costs included in GP2 . It is a good measure to analyze how much margin is left to cover marketing costs. Categories or brands that have close to zero GM2% might be a good idea to exclude from marketing activities. Formula: GP2 / Revenue

Gross Margin 3 (GM3%)

Gross Margin 3 is the proportion of revenue after all variable costs being considered, including the marketing costs. A positive GM3% margin is necessary to cover any additional fixed costs further down in the P&L. 

Formula: GP3 / Revenue

Cost of Profit (COP%)

Cost of Profit (COP%) is the marketing spend in relation to profit (Gross Profit 2) expressed as a percentage. A COP% of 50% means that half of the profit is used to increase sales through marketing. 

Formula: Cost / GP2

Profit on Ad Spend (POAS)

Profit on Ad Spend, or POAS, is the Return on Investment expressed from a profit perspective. Similar to Return on Ad Spend, where the Return most commonly is defined as Revenue. A higher POAS means higher profitability in the marketing efforts. 

Formula: GP2 / Cost

Average Profit Per Order (APO)

Average Profit per Order is defined as the average profit in absolute numbers per transaction expressed as a monetary value. 

Formula: GP2 / Orders