Everybody loves e-commerce.
For buyers, it offers unparalleled convenience and control. And given prevailing world conditions, online shopping is by far the safest option. With everything from luxury apparel to essential groceries available online, e-commerce truly is here to stay.
For retailers, it presents an opportunity to reach people in a much wider catchment area than a brick and mortar store ever could. Plus with no additional overheads other than the cost of advertising and shipping, it offers better margins on certain products like perishable goods.
Direct-to-consumer brands benefit even further by cutting out retail middlemen whose share of the pie drives up the price end consumers pay.
But when you advertise for products online, it’s easy to fall into the trap of thinking that a positive ROAS means you’re turning a profit.
Why ROAS is not the best indicator of success
To illustrate how misleading ROAS can be, let’s consider three hypothetical product groups in a shopping campaign. Each group contains a single product, and each product has a different price (conversion value) and profit margin (excluding ad costs).
In scenario A, the ROAS makes it seem like you’re breaking even. But what’s actually happening is that you’re spending $100 on ads to sell a $100 product at a margin of $75. That covers only three-quarters of your advertising budget, so you’re actually losing $25 per sale.
The ROAS for scenario B looks like you’re getting a 2x return. But you’re spending $100 on ads to sell a $200 product at a margin of $100 – that means all of your margin is spent on advertising. So while you aren’t making a loss like scenario A, you’re also not making any profit.
Scenario C is what e-commerce advertisers want to aim for. You’re spending $100 on ads to sell $500 worth of products at a margin of $125. The margin here is the smallest of the three, but each conversion yields a true margin of $25 after ad costs. That makes it the only profitable scenario.
Optimizing for profitable shopping campaigns is a combination of aligning operating costs, sale price, and advertising costs to find a ROAS target that will reflect well on your books, not just an end-of-month Google Ads report.
As a result, shopping campaigns can embrace a variety of structures – grouping products by ROAS target, profit margin, and groups of individual products (GRIP) are all viable depending on what you want to do.
To optimize these campaigns, some of the things you may wish to try are:
- Segment products based on returns, brand, or category
- Bid higher for high-converting products and/or product groups
- Add negative keywords to sculpt traffic and ignore irrelevant search terms
Remember, the example we’ve provided is purely illustrative. In the real world, there’s usually a tradeoff between ROAS and volumes. It’s usually difficult to achieve high numbers for both, so high-volume conversions tend to have a lower ROAS and vice versa.
Optmyzr’s Shopping Campaign Builder allows you to build new shopping campaigns. The tool uses your merchant feed to smartly group products based on your chosen split hierarchy. We include options to create campaigns by ROAS and price, which you can’t do directly in Google Ads. You can create both standard and Smart Shopping campaigns, restructure campaigns created outside of Optmyzr, and set bids.
Tracking Your Progress
As with any outcome, it’s important to use performance indicators both in and beyond the ad platforms to see how much progress you’re making. Optmyzr recommends tracking the following metrics at different stages of your effort to optimize shopping campaigns for true profit.
Beginner metrics are for when you want an initial lift. At this stage, you want to track Impressions, Clicks, and Conversions.
These beginner metrics give you an idea of whether your shopping ads are getting in front of the right people, whether those people are showing interest, and whether that interest is strong enough to generate a sale.
You want to start tracking these intermediate metrics after achieving some degree of growth. At this stage, you should be tracking Conversions and Costs.
These intermediate metrics are ideal for when you start to optimize your campaigns, filter out expensive and low-converting products, and restructure product groups based on profitability or ROAS target.
Advanced metrics like ROAS and True Profit Margin are for when your campaign is running like a well-oiled machine.
These metrics help you better understand at what ROAS target your product groups and campaigns become profitable, and whether that profitability is limited to the advertising ecosystem or extends to your actual ledger.
If used efficiently, Standard Shopping campaigns can bring you profitable results. So, if you are leaning towards Standard Shopping over Smart Shopping, here are some tips to run profitable Standard Shopping campaigns.
With Q4 upon us, you can turn to Optmyzr Shopping optimizations to get your Shopping campaigns ready for the holiday season.