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pile of moneyBid management programs are indispensible for paid search campaigns. Without them, you’d spend all your time recalculating what the right bid would be and have no time to do anything else. But you can’t just let them run on auto-pilot. Bid management programs can optimize on many metrics, but gross profit is not one of them—and that’s what most businesses optimize. So what can you do?


Google and Yahoo! are trying to make bid management easier. Google’s Conversion Optimizer and Yahoo!’s Campaign Optimization are both attempts at this.
Both help you optimize your conversions based on how much you spend to get them (Cost Per Action and return on Advertising Spend both get after this same concept). But what you really want to optimize on is profit, or even Lifetime Value.
And today’s tools don’t do that, because they are transaction-oriented, and you probably can’t calculate overall profit (although you can calculate profit margin) or Lifetime Value. Profit requires that you understand how to re-allocate your fixed costs every time you sell something, which accountants are only starting to think about. You can think of this as continuous accounting, where you know where you stand all the time, rather than only at the end of a period.
Until we get there, we are stuck measuring transactions in isolation and living with CPA, ROAS, or (better) profit margin. So how do you cope with that.
First, you must understand that these automated optimizations won’t necessarily optimize your profit. You might have to test a big increase in bids to see what happens. You might need to kick-start your bids in a whole new neighborhood to see what sales result, and then let your automated systems kick in from there.
Automation is a good thing, but you must routinely examine how it is working. These systems don’t yet substitute for human judgement.

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Mike Moran

About Mike Moran

Mike Moran has a unique blend of marketing and technology skills that he applies to raise return on investment for large marketing programs. Mike is a former IBM Distinguished Engineer and the Senior Strategist at Converseon, a leading social consultancy. Mike is the author of two books on digital marketing, an instructor at several leading universities, as well as a Senior Fellow at the Society of New Communications Research.

8 replies to this post
  1. Thanks Mike for your valuable insights. Can you suggest some “automated systems” that try to optimize campaigns based on profit margins. Clearly, these margins should take into account the pay per click costs as well.
    Thanks,
    Nadir

  2. Hi Mike –
    You brought this up in a conversation in Chicago, and I didn’t follow you then. Now from this post, is your point that a bid management system falls short because it can’t allocate fixed costs? Zounds! In all my career, I’ve considered fixed costs as fixed — the catalog marketing team doesn’t explicitly load back the warehouse cost on the P&L of each version… rather, we as direct marketers try to maximize marketing contribution (net sales less cogs less ad expense less other-variable), knowing that that contribution needs to cover fixed costs, taxes, and profit. Expecting a bid management system to do cost-based accounting is a bit much, IMHO. If you back off from that, why can’t a bid management system optimize against total (not %) marketing contribution (eg, sales less cogs less advertising less other-variable). Indeed, this is the preferred metric our bid management platform optimizes against…
    An important issue, please explain your excellent points here more slowly for those like me who aren’t catching your drift at your regular speed :)
    Happy weekend
    Cheers
    Alan

  3. Thanks for the comment, Alan.
    A little-known failing of mine is that I majored in accounting in college, so perhaps I look into these things more deeply than I ought, so I spend time thinking about notions such as continuous accounting.
    I don’t expect bid management systems will be able to allocate fixed costs anytime soon. But I also haven’t seen one that even accurately tracks variable costs–the difference, for example, between what is charged for shipping and what it actually costs. Or the fact that shipping this order will actually trigger overtime at the plant. Continuous accounting systems will solve these problems in the next few years, I think.
    But I am very intrigued about the system you mention. Is the system that you use one that you developed or a commercial system? I’m not familiar with any commercial system that even worked as you describe, which I agree is a huge step forward.
    Most companies are stuck using Google’s system or another similar one, which reduces them to optimize for profit margin or cost per action or some other measure that requires manual intervention. That’s who I was writing this for. I’d love to hear more about what you use.

  4. Hi Mike,
    Thanks for taking the time to write the article. We have taken that into consideration with our clients and try not to get into a cookie-cutter mentality when it comes to optimizing a campaign.
    Some clients prefer CPA, some ROAS and we do have clients that want to optimize on Gross Profit Margin.
    We accommodate each one of these – so clients aren’t really stuck per your quote. “Until we get there, we are stuck measuring transactions in isolation and living with CPA, ROAS, or (better) profit margin. So how do you cope with that.”
    Businesses just have to find the right partner that can manage to their goals, and there are SEM’s out there that can do this.
    Regards,
    Dave Carberry
    Director of Product Sales – OutSearch

  5. Mike, it sounds like your general thesis is that simple ROAS optimization is bad and that since search campaign management tools don’t have cost of sale and or product margin data, then they cannot be used to optimize search campaigns.
    I would argue that this is a bad thesis:
    a) Tools like the Omniture bid management offering already have the ability to import this data now, as we speak and clients are optimizing campaign on it.
    b) Mercent, a shopping comparison site feed manager, has this ability as we speak. In fact it integrates directly into an inventory system and will stop placing ads the second inventory is completed.
    c) We live in a world Web 2.0 world and are rapidly moving to a Web 3.0 world in which data integration is very easy and data connections are ubiquitous.
    d) Making strategic plans based assumptions about on the inability of technology to adapt to a need is a losing proposition.
    Do they do it all now: No.
    Will they ever do it all: no.
    Can they do 90% of it and make recommendations that should be reviewed by an expert (a technique that is or should be called heuristic confirmation?) for the other 10%: yes

  6. Mike,
    Sorry if I’m a little late to this party, but I think quite a bit of what you describe is possible by accepting data feeds from an advertiser that tell us things we don’t know at the time of purchase.
    For example, when a sale is made, you can capture the unique order ID, sale amount, postage etc. A data feed from a client’s database could tell you more, e.g. margin on the sale, profit/loss on the postage, new/repeat purchase and so on. As long as that data is matched to the unique order ID that was captured at the sale, there’s no reason why the new data can’t be used for optimisation.
    I think the most obvious way we use this is for finance clients, such as tracking a mortgage application from initial inquiry through to credit check, approval and money transfer, even though most of this happens offline. As long as a unique ID can be captured at the start and is present throughout the process (online or offline), a data feed can tell us everything we need to know.
    One weakness of a lot of bid management systems is that they can only operate with their in-built pixel tracking. There’s a lot more to it than that.
    Happy Thanksgiving,
    Jon Beeston
    Client Services Director, UK
    Efficient Frontier

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