What is profit bidding?
Patrik Segersven
September 5, 2021 (6 mins read)
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.
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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.
History and future of bidding strategies
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.
Parfym.se increased their profit after advertising spend by 303%
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
Taking into account kick backs and different VATs when optimising sales to increase advertising profitability
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.
From bidding with a revenue target to bidding with a profit target – increasing gross revenue by 71%
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.