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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. 

What is profit bidding?

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.