Slashing Sales to Increase Profits

Speedometer - Rising Profits Successful BusinessI once took over management of an AdWords account where the company’s average profit per sale was about $90.  The CEO told me they were willing to spend as much as $75 to obtain a sale, and when I took over the account, their prior AdWords management company appeared to be doing a good job of staying below that target at an average of $70.

They recently had a decline in their total sales, and I was told that my primary objective as their new PPC manager was to increase sales ASAP.  OK… Let the analysis begin.

This company was getting most of their traffic from broad match terms – which means that unless you do some serious digging, it’s extremely hard to control what terms you’re bidding on, and even harder to see what terms are more expensive than others.  As a result, you very well could be losing money on certain terms, when it appears that you’re actually making money.  When I started analyzing their account, I noticed something very interesting.

They had been getting lost in the numbers:  Because broad match was covering up so much of what was actually going on, the company’s “slam dunk” and “easy money” keywords were subsidizing their “big loser” keywords. No one had ever noticed this because the average of all of their AdWords sales combined was $70 – a bit under the CEOs target of  $75.

My advice to the CEO: Cut sales by 25% and increase profits by 25% (Not ROI… Profits!) After that, add more sales with your newfound savings.

At first, he thought I was crazy, but when I showed him a spreadsheet like the one below, he realized that he had been losing about twenty cents on the dollar on about $135,000 of their advertising budget, he quickly stopped focusing on total sales volume, and told me to go to work.

The “easy money” keywords: About 45% of this company’s 3500 sales per month from AdWords were averaging $60 per sale (bringing in $90 per sale in profit). Excellent! Let’s figure out how to get more of these sales.

The “slam dunk” keywords: About 25% of the company’s sales were even better.  This company was in the fortunate position of being well known in the industry, and whenever someone searched for their product specifically – the traffic was extremely cheap to obtain, it converted at a high rate, and it was only costing them about $20 per sale (which still brought in about $90 in profits.)  Great news! Unfortunately, there wasn’t really a way to get any more of those sales with simple bid management since they were already pegged at the #1 position for those keywords.  (There are other ways, but that’s another topic for another time…)

The “big losers”: Now came for the final third of their advertising budget…  About one third of the company’s sales were coming from extremely high-volume, highly competitive, and extremely volatile keywords that converted at a very low rate.  The average cost per sale for these keywords was $90 to $110 in good months, and as high as $140 in bad months.  Even in their good months, they were losing $.20 for every dollar they spent in advertising for this group of keywords. Their bad months meant they were spending as much as $2 for every $1 in sales. Not good!

Let’s dissect these numbers, shall we?

  • With an average of 3500 sales per month, the company was bringing in $350,000 in sales, $346,000 of which they got to keep (not counting fixed costs such as rent, employees, insurance, their AdWords costs, etc.)
  • At $70 per sale, their average expense was $243,000 in advertising.
  • $346,000 less $243,000 sounds great, right?  That leaves $104,000 per month for rent, employees, insurance, and profit!

 Now, let’s see what happens if we simply cut out the “big loser” keywords that are averaging a cost of $110 per sale.  

  • Doing this, will cut sales by 25%. However, when you look at the numbers, they look like this:
  • $346,000 in sales would be cut to about $236,000
  • AdWords expenses would be cut to $109,000 (1225 sales at a cost of $20 each, plus 1400 sales at a cost of $60 each.)
  • Now, the company can cut their expenses by over 50%, and increase gross profits (not ROI, but profits) by about 25%.  (ROI would increase by nearly 300%)

Now for the fun part.  Notice that by cutting out the really expensive keywords, the average cost per sale drops from $70 to $41.  Now, we’ve got room to get more aggressive with those keywords.  After that, we can lower bids on the “big loser” keywords so we’re not losing money for each of those sales. We still won’t have as many sales, but we’ll then be making even more money than had we continued with the trend of losing big bucks on 1/3 of our sales without even knowing it.

The moral of the story: Even if you’re doing extremely well, broad match keywords are probably putting up a big smoke-screen. With some simple structural changes to your AdWords account, you can cut unnecessary costs, increase efficiency, and virtually guarantee an increase in profits.

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