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Is Your Cost-per-Click Advertising Actually Profitable?

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Shopping portals, comparison-shopping sites, and search engines allow merchants to promote increasingly detailed merchandising offers with the goal of cost-effectively increasing brand visibility, acquiring new customers, and driving incremental revenues.

But how does an online retail merchant ensure that third-party shopping destinations and other referral-based merchandising channels contribute to the bottom line?

The answer lies within back-end retail line-of-business systems that handle inventory, purchasing, order, and customer data—systems not traditionally associated with online marketing, but critical to online retail marketing success.

More Meaningful Metrics

The online retail marketer wants to know which combinations of product assortments, channels, and merchandising offers will yield the highest return against key retail planning metrics—which are not typically incorporated into online advertising campaigns or management systems.


Online advertising performance is traditionally measured by click-through rate (CTR), conversion rate (CR), cost per acquisition (CPA) and return on ad spend (ROAS):

  • CTR is the percentage of site visitors that result from an online ad pageviews.

  • CPA is the cost to acquire a new transaction or customer through a marketing channel.

  • ROAS represents the sales revenue generated per dollar spent on an online marketing channel or a given ad within that channel.

  • CR refers to the percentage of referred visits to your site that convert to a sale.

Unfortunately, these de facto standards for measuring advertising performance are misaligned with the most important measures of retail success. What retailers need to know to make informed advertising decisions is how a given product that's promoted through a given channel contributes to key retail metrics.

For retailers, these metrics typically include average order value (AOV), gross profit (GP), gross profit margin (GPM), gross profit margin return on investment (GPROI), gross margin return on inventory investment (GMROII) and life-time value (LTV):

  • AOV ($) = sales / number of orders

  • GP ($) = sales - cost of goods sold

  • GPM (%) = (sales - cost of goods sold) / sales

  • GPROI (%) = (sales - cost of goods sold) / cost of goods sold

  • GMROII ($) = gross profit ($) / average inventory at cost

  • LTV ($) = present value of the gross profit from a given customer over a projected period of time.

The last of these retail metrics, LTV, is the present value of a projected future stream of profit from a customer. Many factors go into loyalty, retention and repeat sales; but, fundamentally, the retailer must be able to segment and track customers by online channel to understand the return on LTV of an online marketing dollar spent.

GMROII (pronounced "gym-roy") is a measure of merchandising efficiency as it relates to revenue, inventory, and gross profit. The goal is to maximize sales and profit margin while minimizing the dollars held in inventory investment. The higher the GMROII percentage or dollars, the better return a given SKU or assortment is giving the retailer.

Applying Retail Metrics to Online Advertising

To calculate these retail metrics for online advertising campaigns, the merchant must have the ability to marry sales, conversion, and ad spend information from online marketing channels with retail planning data, including per-product cost of goods sold (COGS) and average inventory values.

The union of online advertising metrics and retail planning metrics produces critical retail measures of the business impact of online advertising campaigns, such as gross profit return on ad spend (GPROAS), gross profit per order (GPO), gross profit per acquisition (GPA):

  • GPROAS (%) = gross profit ($) / ad spend

  • GPO = gross profit ($) / number of orders

  • GPA = gross profit ($) / number of new customers

Knowing Whether You Acquired the Customer

Referral-based advertising channels are attractive because the retailer pays only for targeted traffic. The cost to acquire an order is generally lowest through these channels, but the question remains: Did you really acquire the customer? If you did, how much did that customer really cost you, and just how profitable is the customer?

If the referring channel has more affinity to the consumer than the retailer's ecommerce site, the customer may be referred back to the retailer over and over again, reducing or eliminating the profitability of that customer.

Loyalty, retention, and life-time value of the customer metrics are key to understanding whether the customers that are served through a given channel are really profitable. When you are able to segment and track your customers by their channel of acquisition and calculate the ongoing online marketing costs for each customer, you are in a position to know whether you have acquired a profitable customer (or one that is trending toward profitability).

Taking Action: Manage Your Online Ad Spend to Key Retail Metrics

Knowing where to spend more of your online advertising budget to realize greater returns against key retail metrics is fundamental to competitive online ad spend optimization, yet most online marketing management or bid management tools are incapable of capturing and processing the retail information needed to easily optimize ad spend on these terms.

Progressive retailers are turning toward technologies and solution providers that can optimize SKU-level or item-specific merchandising as measured against these key metrics.

Your brand image is critical, but if you're not thinking about merchandising in terms of the most detailed product attributes and variables—pricing, title, description, keywords—you're not fully leveraging available merchandising control. If you're not measuring the impact of your merchandising effort by key retail metrics, you're missing out on an opportunity to drive the strategic value of every ad dollar.

You should be able to segment and identify customers acquired through each online channel, not only so that they are properly costed but also so that their loyalty, retention, and profitability may be evaluated over time. A natural first step in collecting this information is to source-code your click-through URLs and append customer records with acquisition-source and cost-of-acquisition data.

If you have a homegrown online marketing tracking and reporting system, start by adding product cost and inventory turns to your return on investment calculations. If you use third-party tools or an advertising agency, insist that the online channel advertising solutions used are informed by your back-end retail line-of-business systems. Even the basic inclusion of product cost and inventory values will transform your online marketing approach.

Information on customer valuation combined with the ability to report against your key retail metrics as a function of your online ad spend—by SKU, by online channel, and over time—will give you the ability to make every click count toward improved top-line revenue, inventory velocity, and profitability.

If you're interested in learning more, consider attending our double header seminars on March 8 & 9: Essentials of Paid Search Marketing and Advanced Topics in Paid Search Marketing. Or buy the recordings and listen to them any time.


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Glen Hamilton is VP of product management at the Mercent Corporation (www.mercent.com).

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