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Q: What is the secret to optimizing your Google AdWords PPC campaigns?
A: Using Google Analytics.

When managing and optimizing Google Adword campaigns I find one of the most powerful/useful tools to be Google Analytics. Specifically the data found in the AdWords Campaigns report under the “Clicks” tab and in the “Margin” column.

The numbers in the “Margin” column reflect the margin that you have earned based on revenue earned and PPC costs paid. The data in the Margin column is calculated as:

(Ecommerce Revenue + Total Goal Value  Cost)/Revenue

The higher the Margin figure reported by Google Analytics the better you are doing.

The “Total Goal Value” is a dollar amount that you would need to have added manually when configuring your goals. Goal Value is primarily used as a way of monetizing non-transactional goals (leads). For e-commerce sites you can set up a goal that is a successful transaction and set the goal value to be the lifetime value of a customer. This is a quick and easy way to included the lifetime value of a customer into the “Margin” data.

A quick and dirty way to calculate average lifetime value is:

Average value of repeat orders * the reorder rate * the average number of repeat orders

Example; If 10% of people reorder on an average of 3 times with an average value of $80 then the ~ lifetime value of these customers is $24.

To be more accurate you will also want to consider the fact that when someone returns for another purchase they will be assigned the same lifetime value as a first time purchaser and in reality they should have a lower lifetime value at this point.

The reason I find this Margin data so valuable is that it takes into consideration the value of the transaction as well as the costs to get a transaction. This is much better than looking at the average Cost Per Acquisition as CPA gives you no indication as to the value of the transactions taking place. Margin data helps you better manage situations where there is uncertainty around the value of AdWords transactions (do they have higher values per transaction or lower values).

A properly configured AdWords account will have campaigns and Ad Groups set up to represent different products/services. This will allow one to optimize different products/services based on their own margin figures as certain products/services will have different profitability or margins. This allows you to increase or decrease your bids for keywords based on the value that the resulting transaction has for you business.

Now that we know what the Margin data represents how do we use it. To properly use the Margin data you will need to calculate your “Target Margin”. Google doesn't do this calculation for you, instead you must do it yourself. To calculate a target value for your Margin you need to calculate all of the costs associated with your operations on a per transaction basis/product (cost of goods, freight, warehousing, customer service, telephone, website, returns, shipping materials, shipping…) as well as how much money you want to make as a profit per transaction.

Here is an example:
Average Transaction value for product 'X' – $60
Cost of Goods (two units are sold in the average transaction)- $10 each ->$20
Freight Cost/unit – $0.50 -> $1 for two units sold in this average transaction
Customer Service/ Transaction – $2
Shipping, Materials and Warehousing/transaction – $18
Telephone, website/transaction – $10
Target Profit – $5
Total – $56

In this example you would need to target a margin of ~94% or higher.
1-((60-20-1-2-18-10-5)/60) = 93.33%

If you were to include the life time value of the customer that was calculated above the target Margin would be ~54%
1-((60+24-20-1-2-18-10-5)/60) = 53.33%

The lower your “Target Margin”, the more flexibility you will have to increase your bids and be more aggressive. One way to increase your “Margin” figures and beat your “Target Margin” is to improve the conversion rate of your campaigns. This can be done by improving the ad copy, adjusting your ad position, geo-targeting your ads, improving your landing pages and improving your conversion funnel.