Beginner’s Guide to Profitability Calculations for Ecommerce Stores on Google Ads

In this article, we’ll be discussing how to get started with profitability calculations for your Google Ads campaigns so you can get the most out of your advertising budget while making true profit from all your sales and conversions. 

First off, let’s discuss why profitability calculations are so important for eCommerce stores by starting off with an example. Imagine that you’re a business that sells sportswear apparel for football athletes. You’re running three Google Ads Shopping campaigns, with each Shopping campaign targeting a different stage of the customer journey. You saw that all the Shopping campaigns have generated each of the following results for last month:

• Shopping Campaign A has generated $12,000 in revenue against a $4,000 ad spend
• Shopping Campaign B has generated $5,000 in revenue against a $1,000 ad spend
• Shopping campaign C has generated $3,000 in revenue against a $400 ad spend

At first glance, looking at these 3 campaigns, you might think to yourself, “Shopping Campaign A is performing really well, I should increase the budget!” which is where some marketers and business owners make the biggest mistake when it comes to E-Commerce Google Ads. Without knowing your profit margin, which is defined as the amount by which revenue exceeds costs in a business (e.g. overhead costs, operating expenses, staff salary, transportation, etc), you might be getting tunnel vision in terms of knowing which of these 3 campaigns you should be improving on.

If you actually knew what your profit margin was, you’d be able to find out which of these 3 campaigns is the best one, and which one should be optimized. Let’s say you know that your profit margin is 30%. For every $100 of revenue, you retain $30. If you spent $30 to get $100 of revenue, you would be getting breakeven, with a breakeven ROAS of 3.33. Now that we know what your breakeven ROAS is let’s take a look at the 3 Shopping campaigns again:

• Shopping Campaign A – $12,000 in revenue with a $4,000 ad spend = ROAS of 3.0
• Shopping Campaign B – $5,000 in revenue against an $1,000 ad spend = ROAS of 5.0
• Shopping Campaign C – $3,000 in revenue against a $400 ad spend = ROAS of 7.5

Knowing that our breakeven ROAS is 3.33 to make a campaign breakeven, we know immediately that Shopping Campaign A needs to be improved, in terms of increasing the ROAS. It may be driving a lot of revenue but it’s not generating enough to be considered a profitable campaign, let alone make breakeven, compared to Shopping Campaign B, and Shopping Campaign C. With Shopping campaign B at a 5.0x ROAS, you make a profit of $700 (($5,000 * .30) – $1,000) while for Shopping campaign C at a 7.5 ROAS, you make a profit of $500 (($3,000 * .30) – $400). Looking at these numbers, Shopping campaign B is the clear winner in terms of profitability.

That is how profitability calculations can help you differentiate which campaigns are performing poorly in your ad account which will be crucial for all future optimizations. It’s amazing how profitability calculations can help guide your strategy and data interpretation for your Google Ads campaigns! 

Now that we know how important profitability calculations are, let’s talk about the most important metrics in Google Ads:

1. ROAS – Return on Ad Spend is the numeric value of revenue divided by ad spend. This is calculated by dividing revenue over ad spend (i.e. $5,000 / $1,000 = ROAS of 5.0)
2. Profit Generated – This metric isn’t native to Google Ads, but it’s calculated by multiplying your revenue against your profit margin and subtracting your ad spend from the product (e.g. [($5,000 * .30) – $800] = $700 in profit)
3. CPA or Cost / Conversion – This is the average amount you’re paying for each conversion. If you have a good campaign structure, marketing funnel and a good CRO for your website, it’s easy to get a low CPA for Google Ads.
4. CPC or Cost / Click – This metric shows how much you’re paying for each click on your ads. With industries that have high competition i.e. if you are bidding in an industry niche with big stores/brands like Amazon, Nike, Samsung and the like, you should expect this number to be very high than the average $1.00 you’re used to seeing.
5. SIS or Search Impression Share – Search Impression Share is the percentage of searches that you’re showing up for calculated by dividing your eligible number of impressions against the total number of impressions for your targeting settings (e.g. keywords, placement targeting, topic targeting, etc.) based on Google’s calculations.
6. Cost – How much you spent for your campaigns. Most marketers want to get a good balance of cost, CPA, and ROAS for all accounts.
7. Revenue or Conv. Value – How much a campaign generated in terms of revenue / conversion value. For lead generation campaigns, this is calculated by taking the average cost per lead acquisition divided by the number of leads needed to get an actual conversion.
8. Conversions – This metric shows how many leads/purchases a campaign was able to generate.
9. Average Order Value or Value / conv. – This is the average value of how much each conversion is worth by dividing the conversion value over your total conversions. This gives you an idea on how much each conversion is worth and gives you the average order value i.e. what your average revenue per conversion is.
10. Avg. Profit per Conversion – This metric also isn’t native to Google Ads but it’s calculated by dividing your Profit Generated over your total number of conversions. (i.e. ([conv. value * profit margin] – cost) / conversions) This gives you an average number of how much profit you make per conversion.

Now you may be thinking, “These are so many! Which one should I focus on if I don’t have the time to look at all of these metrics one by one?!”. If you’re one of the marketers or business owners that have a lot of accounts in their current roster that can only do so much with the time they have, you can focus on these two instead: ROAS and Profit Generated. No matter what situation you’re in, you have to make sure that you’re finding the time to improve the campaigns with these two metrics in mind. Let’s do a deeper dive into these two metrics and why it’s important to find the balance between the two:

• ROAS – how is the return on ad spend calculated by Google? The simple answer is this: divide your conversion value over your cost. It’s as simple as that! Fortunately, this is a native column option available on Google Ads called: Conv. Value / Cost. The value shown in conv. value / cost is the single or double digit representation of how much higher/lower your revenue is compared to your ad spend i.e. 3.33 ROAS means that your revenue is 333x higher than your ad spend. Now you may be thinking, “I have a really high ROAS, that must be good!” and you could be right… if you know your profit margin and whether that ROAS is actually a good number or a bad number. Which brings us to our second most important metric:
• Profit Generated – as mentioned earlier, profit generated is the net profit your campaigns were able to generate after taking your profit margin and ad spend into consideration. The formula for computing profit generated is as follows: ([Conversion Value * Profit Margin] – Cost/Ad Spend) Seems simple enough, right? But without your profit margin, this formula cannot be used for your Google Ads account. With that in mind, you have two options:
  
  1. If your business has a lot of moving parts or is just starting, you can use the standard E-Commerce profit margin of 25%. This is a fairly conservative profit margin, but it will help you set up a temporary guide on how much you should be spending to be profitable and will allow you to recompute your actual profit margin once you get enough data for your business.
  2. The second option is actually computing your profit margin. There are three kinds of profit margins typically used for businesses: 1) gross profit margin, which is the profit margin that remains after accounting for the cost of goods sold, 2) operating profit margin, which is the profit margin that takes into account all operating expenses & cost of goods sold and, 3) net profit margin, which takes into consideration both cost of goods sold, operating expenses, as well as credit, one-time expenses or payments, and even income from investments or secondary operations.
     
     For this formula, gross profit margin, and operating profit margin are the best profit margins to use. If you would like take into account the cost of goods sold only, use your gross profit margin which is calculated by subtracting Sales/Revenue against Cost of Goods Sold divided by Sales:

For the Operating Profit Margin, you will need to compute your operating profit first which is calculated by subtracting all operating costs from your revenue:

Operating Profit = Revenue – Cost of Goods Sold – Operating Expenses – Depreciation & Amortization

Once that is done, you will have to divide your Operating Profit by your Revenue with the product multiplied by 100:

Now that you know these two metrics, it’s important to note that you have to find the balance between these two to get the most out of your campaign ad spend. Let’s go back to our football apparel store example, which has a 5x ROAS for Shopping Campaign B and has generated a profit of $700. If we know that our breakeven ROAS if 3.33x, we can potentially reduce Shopping Campaign B’s ROAS to 4.5x to get more conversion and sales volume and still generate more profit. Here’s an example of how that would look like if all variables remain constant:

• Shopping Campaign B – $18,000 in revenue against an $4,000 ad spend = ROAS of 4.5
  • With this, the Shopping campaign generates a profit of $1,400 [($18,000 * .30) – $4,000)

While the ROAS went down, the profit generated went up because there was an increase in revenue, at the expense of spending more. These kinds of optimization decisions can typically be done through bidding adjustments i.e. you increase your bids to get more clicks which in turn increases your ad spend, for the benefit of getting more conversions and sales through your campaigns. Finding the right balance between ROAS and profit generated will help guide your bidding optimizations, which in turn will improve the growth and stability of your Google Ads campaigns.

Now that you know about the two most important metrics, let’s have a look at how to add them into your Google Ads account.

Let’s start off with the ROAS or as it’s called in Google Ads: conv. value / cost

1. To add this column to your Google Ads account, simply go to your Campaigns tab on your Google Ads Dashboard and click the Columns icon as seen here: