You can’t manage and optimize a campaign unless you measure the results. Over the years, the advertising community has split itself into two camps, each with their own set of metrics. Direct response marketers measure sales and leads that turn into sales (or those that don’t). Rarely will you hear die-hard direct marketers use the words branding or brand lift. Similarly, although “awareness” is something a direct marketing campaign generates, direct marketers don’t generally use the measure of awareness as a metric. The direct response marketer has a laser focus on measurable results and the media driving those results. Branders, on the other hand, have a whole set of metrics designed as proxies for success, which attempt to quantify the influence that marketing, PR, and advertising have on eventual purchase behavior. When conversions to leads, sales, or other positive behaviors can be tracked, direct marketers scoff at branding metrics, and branders fire back that direct marketers are too myopic, focusing only on obviously traceable behaviors.

As online marketers, it’s easy to get spoiled with the impression, click, and conversion data available at our fingertips. Search marketers are perhaps even more prone to get spoiled because clicks from searches tend to have the highest observable conversion rates. Search campaign reports let you watch those conversions occurring in almost realtime, plus we also have a bunch of additional postclick behaviors you can watch that may or may not be correlated with eventual conversion to leads or sales. You can watch not only every click into your sites from your search engine advertising but also every click thereafter until the visitor leaves your sites.

Every marketer wants to manage search marketing campaigns to maximize profit. Early in a campaign’s lifecycle, this process starts out as a goal of achieving positive return on investment (ROI), which then evolves into a profit metric. Profit is not nearly as easy to measure as observable ROI. This is one reason why it’s hard to imagine that your competitors, who may have locked in top SERP positions using the tactic of bidding significantly higher than you do for clicks, are running profitable campaigns. Instead, you might assume they are spending money on clicks providing a negative return. Your competitors might indeed be crazy, wasting their money on unprofitable clicks, or they might be measuring profitability and ROI differently than you do. In effect, ROI is in the eye of the beholder.

Imagine all the different ways you might choose to measure ROI or attempt to close the data loop to evaluate positive behaviors that correlate to sales, in order to more accurately measure profit from a campaign. For example, you might look at predictors of lifetime customer value, profit per order, offline conversion percentages, and so on.

ROI is this decade’s buzzword. Yet the highest-ROI strategy is rarely a profit-maximizing strategy when it comes to paid search. Bidding less for keywords often improves the ROI at the sacrifice of customer volume. To run a business profitably, you must balance ROI and sales volume. This is called profit maximization/optimization.

The concepts underlying profit maximization go beyond SEM, into the realm of business and marketing best practices. Yet the more clients I talk with, the more I realize success metrics and strategies used for search are sometimes arbitrary and shortsighted. Worse, they may not be aligned with nonsearch marketing strategy and objectives. Admittedly, execution of search campaign optimization can be complex and daunting. As a marketer, your responsibility is to use metrics and objectives that drive profit. The marketing and profit objectives you select should be consistent across media, online and off.

Warning: The following can hurt your brain! But please don’t be intimidated. MBAs need semesters of schooling to absorb the concepts underlying this analysis (it’s been over 10 years since I first absorbed them at Yale). Luckily, I liked economics and use these concepts every day in my business and for clients. My objective is to explain and illustrate marginal profit and elasticity. If I confuse you, please let me know.

High ROI campaigns and ROI maximization sound wonderful. But in reality, they’re hard to achieve. For example, you may know you can’t really achieve volume maximizing ROI, because you run lots of listings in multiple engines. The highest ROI campaign possible is one in which you can have your best-converting listing at a minimum price (cost per click [CPC]). The cost per order/lead/action for this listing is the lowest you can go in the search marketplace; in other words, it is ROI maximized.

Let’s assume that to acquire this very best listing, you spend $25 per month and drive $3,000 in sales at a 50 percent profit. Don’t start celebrating yet. Where’s the conversion volume? There may not be any at all. So you need more traffic, and you may be willing to accept lower ROI on broader, higher volume listings that—while they may not share the same ROI as your very best listings—provide marginal ROI that is still positive.

Sophisticated search marketers balance ROI optimization and profit maximization. Imagine you have the perfect balance between traffic volume and ROI. In this scenario, you get high conversion volume (sales/leads/actions) and positive profit. On a listing-by-listing basis, you’re lowering per-unit profit in exchange for additional clickthrough/ sales volume delivering an increase in total profit.

Raise your media price (CPC or CPM) too high on a particular listing, given a particular conversion rate, and you’ll get negative profit. Drop it too low and you’ll miss out on the additional total gross profit produced by additional sales/leads/actions (opportunity cost). Economists would recommend you continue to spend more on traffic until the incremental (marginal) profit you earn by spending more drops to zero.

That’s a theoretical solution. The real world is rarely that simple. Without complex marketing automation systems, a manageable way to move to a profit-maximizing campaign management strategy is to know your cost per order/lead/action across all marketing media, as well as where your target price for such media needs to be to make a reasonable profit.

How do you do this? Start by setting a specific goal, in terms of cost per order/cost per action (CPO/CPA) for your campaign (or by individual listing, if listings result in different products being purchased or address different profiles of the purchaser). Manage campaign listings around this CPO/CPA goal. You’ll see almost immediately which listings deliver conversions at a rate close to your CPO/CPA goal, while simultaneously driving a high volume of conversions and traffic.

Your campaign management is probably based on some post-click conversion cost objective. Based on your CPO/CPA objectives and targets, you must (manually or automatically) move your bids up and down, causing some of your listings to oscillate in positions. The search engines generally place the top 1, 2, or 3 ads at the top of the screen and often syndicate those same listings to other search engines. Often the dynamic change in positions of your ad occurs right at the edge of the premium high position/heavily syndicated levels. For some of these listings, a small price increase may result in large click volume changes as your listing elbows its way above those of your competitors. This volatile and dynamic situation presents a profit-maximization opportunity. Consider the following scenario:

• Revenue per sale is $200 with a wholesale product cost (to you the merchant) of $130.
• The maximum CPO for your campaign (or group of listings) is set to $50, meaning you are targeting an order costing you no more than $50.
• Net profit per sale (after subtracting the $50 CPO) is $20.
• Given a specific conversion rate to sale for inbound clicks (let’s assume a 4 percent rate), you are limited in the price you can bid for each click to $2 ($50 × .04).
• At $2 (all you can afford to pay), your ad listing’s search results position tends to be 4 to 6 on average, is not heavily syndicated, and is low in visibility on the search results page, resulting in only 1 percent of searchers who see your ad clicking it.
• At 1 percent of the clicks, you currently get 50 orders per week.
• Total profit is $1,000 (50 × $20).

If you were to raise the allowable target CPO for your listing to $60, based on your conversion percentage, you would be able to raise your bid per click significantly to $2.40, which would likely raise your average position a couple of notches, perhaps to the top position. Because of the higher visibility of the top positions and the inclusion of your listing in more syndicated search engine partners such as AOL (which has a syndication relationship with Google), traffic and orders would increase significantly to 150 orders a week, with a new profit per sale of $10 and a total profit of $1,500 on that specific ad listing. In this scenario, advertising spending rises dramatically, but so does overall profit, even as the presale profit drops. This is an example of using the concept of profit maximization to control bidding for a single listing.

But wait. You don’t have just one listing; you have lots of them, in many engines, plus other media opportunities. Assuming you have all the information you need to make decisions (by using killer web analytics) and an ability to execute campaign changes smoothly and efficiently (by not expending too much time and money on processes and analysis), you can profit-maximize your entire campaign at once, raising and lowering CPO targets to find the best trade-off between volume and profit.

Deciding where to put every additional (marginal) marketing dollar involves looking for the best deals all the time by knowing what’s working best and at what price. Essentially, you’re doing an efficiency and trade-off analysis, not only between listings and engines (comparing them to each other) but also across media types.

This approach is powerful and flexible. If you need to cut your budget, cut the least efficient media placements (the ones with the lowest ROI). Similarly, if you want to increase profitable revenues with more marketing spend, select listings with the highest ROI (preferably where the ROI drop is not large when you raise the CPC or position).

No one has perfect information about all their media buys at the most granular level. But the Internet (and some offline direct marketing media) lets you execute a media allocation method where you can

• Reduce spending on the least efficient element when trimming the budget.
• Add dollars to the most efficient media vehicle to get the biggest bang per buck.
• Generate a media spending analysis based on overall profit.
• Take all actions based on the marginal changes in profit (by going to the highest ROI campaign elements first when seeking volume plus efficiency).

Finding the “right ROI” and the “right profit-maximizing campaign” is where the fun begins. Where marketing, business, accounting, technology, and economics work together to optimize profit, the term convergence has a new meaning.

You may not have the tools and technologies to facilitate marketing automation and campaign effectiveness across, as well as within, media. But you can still use these concepts to implement a combination of analytics and automation to maximize profit within your search campaigns.