Pmax automated: Boosting ROI with a “profit margin” Performance Max campaign structure

What is the profit margin campaign structure?

It's a structure where products are grouped based on their profit margins. Instead of just targeting product categories or customer demographics, this structure prioritizes advertising spend on products with higher profit margins, ensuring that ad euros/dollars are driving the most profitable conversions.

Why this strategy might the best one for your business

In a single Performance Max campaign, every product receives the same level of attention, budget. However, different profit margins indicate varying potential. As a result, some products will yield strong results while others may be less successful. Individual reports may show some products as highly profitable, while others might appear less so. 

For products with a high profit margin, you can afford to pay more for each click or conversion action, or set a lower ROAS target. In contrast, low-margin products have more restricted limits. So you need to approach them differently and focus more on your most profitable products.

Choose this strategy if you want to increase your market share on your high margin products while maintaining profitability. This is especially crucial for businesses where profit margins vary significantly.

The Definition of "gross profit margin"

Gross profit margin refers to the percentage of the price remaining after deducting the direct costs associated with producing the product or service. This metric helps advertisers understand how much of the price remains after covering the direct costs of their products.

To calculate gross profit margin, use the following formula:

Gross Profit Margin = ((Price - COGS) / Price) * 100

• Price: The income generated from sales directly linked to the PPC ads.
• Cost of goods sold (COGS): The production costs or the price at which you acquired the product.

When applying the formula to each of your products, you will obtain values ranging from 0% to 100%. A lower percentage indicates lower profitability, while a higher percentage signifies higher profit margins.

Example of profit margin campaign structure

The bidding should be set like this:

• High gross profit margin (High-GPM%): Set a lower ROAS target and a highest budget to allow for higher bids and potentially greater revenue.
• Medium gross profit margin (Medium-GPM%): Set a medium ROAS target.
• Low gross profit margin (Low-GPM%): Set a higher ROAS target to limit bids, ensuring you maintain profitability.

Lower ROAS target for high-margin products should still be well above the break-even point, but it allows for higher CPC bids, increasing traffic and market share for these high-margin items.

On the other hand, low-margin products need a higher ROAS target to stay profitable. If these low-margin products are grouped with high-margin ones in the same campaign, the system might spend too much on them, which could lead to losses.

TIP: We recommend setting a slightly more ambitious ROAS than your actual goal. Results always fluctuate a bit, and this will increase your chances of achieving a good outcome in terms of profitability. If the campaign is restricted by the goal, you can gradually loosen it and find the optimal settings.

Important: Have at least 30 conversions

The number of buckets you use for a campaign depends not only on the differences in profit margins but also on how many conversions each bucket gets. To get good results, you need enough conversions in each bucket. Typically, you should aim for at least 30 conversions or purchases per month before splitting a campaign into different buckets. This ensures that there is enough data for automatic bidding strategies to work properly. If you don’t reach this number, it’s better to use just one campaign.

So let's now see how this strategy can be set up in Dotidot. Skip the first two steps if you already have a gross profit margin calculated and present in your feed.

First step: Import data you need

To get the most out of this strategy, it's crucial to know your cost of goods sold (COGS). If your e-commerce platform doesn't export this data to the source feed, you can easily enrich your Dotidot data source using Google Sheets.

The sheet should contain your unique ID or Product name and the COGS price. It could look like this:

Let's jump into importing this data to Dotidot: 

1. Navigate to "Data Sources" and select the data source for your upcoming campaign.
2. Go to the "Data Enrichment" section and choose "Google Spreadsheet."
3. Connect your Google Account and select the sheet containing the COGS values.
4. Next, map a unique identifier between the two data sources. In this example, we will map the Sheet ID with the original data source's Product_id.
   You can use "Product name" instead, but there's a lot of room for errors.
5. After that, select the columns you want to import. For this example, you’ll only need to import the COGS column.

If you check your Data source now, you will notice that there is a new column with the name “sheet_cogs”.

Second step: Calculate the gross profit margin

The next step is to calculate the accurate gross profit margin for each product, which will help in segmenting them later. To do this, we need to create a new variable that applies the margin formula mentioned above.

Do this:

1. Navigate to you data source
2. Go to Variables section and click “+”
3. Choose Numeric variable
4. Name it appropriately so you can easily identify it later in your data source. We’ll use “Margin_percentage.”
5. In the Input field, replicate the following formula using data from your source:
   Gross Profit Margin = ((Price - COGS) / Price) * 100
   (See the image below for how it should look)

If you’ve done everything correctly, you should see a new variable called “Margin_percentage” in the “Products” section of the data source.

Third step: Segment your products

You should start by categorizing your products into three groups based on their profit margins: high, medium, and low. This will allow us to create three distinct product sets. Let's begin by focusing on the high-margin products, and we'll apply the same process for the other categories afterwards.

Follow these steps:

1. Navigate to or stay in your data source
2. Go to Product sets section and click “+”
3. Name this set “High GPM” (or any way you want)
4. Select the variable that contains the calculated percentage margin value.
5. Set the appropriate condition. We want products with a margin of 70% or higher, so select the “greater than or equal to” condition and input the value 70.

Fourth step: Build the campaigns

The final step is the simplest. Build your campaigns based on profit margin groups. Set the target ROAS for each campaign, following these guidelines:

• High-profit margin campaign: Set a LOW ROAS target.
• Medium-profit margin campaign: Set a MEDIUM ROAS target.
• Low-profit margin campaign: Set a HIGH ROAS target.

The other most important part of the setup will be Product selection where you need to include corresponding product sets for each campaign.

TIP: If you need help with the Pmax campaign setup, visit our Knowledge base.