What is Profit Bidding?
Profit bidding is a strategy that takes into account profit margins when determining bids for advertising, instead of just focusing on revenue. By prioritizing high-margin products and segments, profit bidding helps businesses maximize their results and achieve sustainable growth. In contrast, traditional revenue bidding tends to focus solely on increasing revenue without considering profitability, which can really hurt the bottom-line and
Why is Profit Bidding Important?
Profit bidding solves several common challenges that marketers face when only looking at revenue data.
Difficulty in Determining Optimal Marketing Investment: Without considering profitability, it's challenging to pinpoint the most rational level of investments. With profit bidding you can even create strategies to maximize GP3.
Automation Levels the Playing Field: When everyone uses the same automated technology to set bids, the advantage lies with those who can best leverage their data.
Reporting and KPIs: Topline Revenue, ROAS and COS% rely on average profitability metrics that does not relieve the underlying profitability for each order, leading to potential overinvestment in unprofitable areas and missed opportunities where margins are higher.
Key Concepts in Profit Bidding
Gross Profit 1 (GP1) The profit after deducting COGS, cost of goods sold from revenues.
Gross Profit 2 (GP2): The profit after COGS and additional costs like pick and pack, payment fees, and logistics.
Gross Profit 3 (GP3): The profit after all costs, including advertising costs, are deducted.
Profit on Ad Spend (POAS): Measures the profit generated for each euro or dollar spent on advertising. For example 200% POAS means 100EUR investment yielded 200EUR in profits.
Cost of Profit (CoP): The cost incurred per unit of profit, similar to CoS% cost of sales but calculated as Cost / Profit.
Steps to Implement Profit Bidding
Implementing a profit bidding strategy involves several steps, starting with accurate profit measurement:
1. Measurement and Validation
Map out a clear overview of each cost component that impacts the profitability of each order. This should include COGS, pick and pack, payment fees, shipping & returns.
Calculate the profit from orders over the past few months and validate these figures with your finance department.
Establish a process for continuous data validation to account for changes in costs.
Implement fallback values for missing data, such as COGS, and set up alerts for any discrepancies.
2. Set up Reporting
High level reporting: Create reporting based on the order level data that you have collected. Make tables and visualizations to get an overview of profitability per market, different channels, campaigns etc. Unify data from various sources (e.g., Google Ads, Meta, GA4) for a comprehensive view.
Customer-level reporting: Create views based on customer level data, to gain insights on new vs returning customers or the customer lifetime value.
Product-level Reporting: Analyze profitability at the product level to identify top performing products, brands and categories.
3. Profit Bidding Activation - switching from Revenue to Profit
Once data collection, validation and reporting are set up, it is time to put the data into action and feed profit data into the ad platform optimization algorithms to bid based on profit.
Report profit data for at least 28 days or three conversion cycles, whichever is longer, before switching to profit bidding.
Validate the accuracy of your data to ensure profit/revenue conversions match within a tolerance of +/-10%.
Set your budget to 1.2x your historical daily spend to prevent heavy overspending during the transition period as the system adjusts to the new bidding strategy.
Change your profit conversion action to the primary conversion metric while setting the revenue conversion action as a secondary conversion. This ensures the bidding algorithm starts optimizing for profit rather than revenue.
In the first few days, monitor cost-per-click (CPC) closely. When you observe CPC starting to decrease (typically within 3-4 days), begin reducing your POAS targets.
Over 2-3 conversion cycles, progressively reduce ROAS targets towards your desired POAS target. To minimize volatility, make incremental changes in your targets, adjusting multiple times rather than all at once.
Tools for Profit Bidding
Kuvio is a SaaS platform that calculates per-order profit and integrates with marketing channels, providing insights and enabling real-time profit bidding. The tool handles all complexities that has been described above, without any involvement with developers etc. All you need is to provide a file with COGS data.
