Calculating the actual profit of your campaigns takes time, however identifying unprofitable campaigns is critical.
A robust way to calculate the actual profit is to use the Profit Per Campaign method that requires that the individual Cost of Goods Sold data is available for each item sold.
Where x is the total revenue per item sold from the campaign and c is the total Cost of Goods Sold for items sold from that campaign.
I.e. this is the sum of the total revenue less the total costs for making those sales.
To calculate this requires that each sale has its profit calculated, then an average allowance of advertising expense is apportioned to each sale. A typical formula to do this is:
To calculate this requires that each sale has its profit calculated and then an average allowance of advertising expense is apportioned to each sale. A typical formula to do this is:
E.g. if an item sells for $80 and it cost $50 to purchase this, $5 in handling costs and a campaign generating 100 sales of these products cost $2,000 then the result would be
COGS = $50 + $5 + ($2,000/100)
COGS = $75
The gross profit for this sale is therefore $5.
As the gross profit figure doesn’t include the fixed costs of running a business including rent, salaries, electricity, hosting costs, etc. it seems unlikely that a $5 return on an $80 sale is going to be profitable and hence either reducing the advertising cost for this campaign or increasing the average sale value is required.
Your company’s finance team can probably provide you with the fixed costs for the business or at least a rule of thumb that you can use to estimate these such as for every $1 in revenue the fixed costs are estimated at $0.30.
If the company making the sale above had a fixed cost allocation of $0.30 in the dollar then the campaign would be making a systematic loss for this business.
Fixed cost allowance = $80 * 0.3 = $24
$5 Gross Margin – $24 fixed cost allowance = -$19
The total loss for this campaign is then -$1,900.
It may be possible to estimate that these customers will later spend on additional sales and it is possible to develop models to forecast this. For further information on this type try searching for “discounted cash flow” and “customer lifetime value”.
To help you out we have created a gross profit calculator that you can use to extract the data from Google Analytics and combine this with your cost data to identify profitable campaigns.
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