In the current economic conditions, marketers are re-evaluating their strategies. Many marketers have gone from maximizing orders subject to a maximum CPA or maximizing revenue at an ROI to maximizing profit. While many marketers think that profit maximization requires a different kind of approach, it is not the case.

1. Optimizing to Maximum Profit
In the currenteconomicconditions,marketersare re-evaluatingtheirstrategies.Manymarketershave
gone frommaximizingorderssubjecttoa maximumCPA ormaximizingrevenueatanROI to maximizing
profit.While manymarketersthinkthatprofitmaximizationrequiresadifferentkindof approach,itis
not the case.Profitmaximizationandrevenuemaximizationare related.Indeed,if revenue
maximizationisdone viamodel basedoptimization,notonlycanone maximize profitbutcan alsogaina
deepinsightinto the tradeoffsmade whenmaximizing toprofit.
The graph above showsthe efficientfrontierforbothrevenue andprofit.We have spoke aboutthe
revenue curve severaltimes,sothiswouldbe afamiliarlookingcurve toa regularreaderof thisblog.
Note,the correspondingprofitcurve.Profitsfirstincrease andthenstartto decline despiteincreasing
revenues.Thiswill alwaysbe the case foranySEM advertiser.Why?The Marginal ROI.As the advertiser
spendsincreasingamounts,the bestavailable advertisingopportunitiesreduce andthe onesleftare the
lessprofitable ones. Further,aslongasthe marginal ROIis above breakeven,profitscontinue to
increase. Asa result,profitsfirstincreasewhenmarginalROI’sexceedbreakevenandthendecline
whenmarginal ROIgoesbelowbreakeven.
$0 $1,188
$1,388 $1,448$1,400 $1,340 $1,188
$188
-$512
-$2,312
-$4,912
-$8,212
-$11,912
$0
$2,878
$5,188
$7,388
$9,448
$11,400
$13,340
$15,188
$16,788
$18,188
$19,488
$22,488
$23,488 $24,088
-$15,000
-$10,000
-$5,000
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000
Efficient Frontier:MaximizingProfit
Profit Revenue

2. The most interestingaspectof the profitcurve isitssensitivity.A closerlookatthe numbersbetween
$4,000 and $14,000 of spend (Table 1) revealsthatthe pointof maximumprofitisat a spendof $8,000
witha profitof $1,448 and revenuesof $9,448. However,note thatthe difference inprofitatthe $8k
spendlevel andthe $14k spendlevel isonly$260 ($1,448-$1,188). On the otherhand,the difference in
revenue is ($5,740). Thisinsightbringsustothe crux of the discussion: Wouldyoube willingto forego
$260 in profit(18% decrease) foran additional $5,740 in revenue (61% increase)?
Cost Revenue Profit
$ 4,000 $ 5,188 $ 1,188
$ 6,000 $ 7,388 $ 1,388
$ 8,000 $ 9,448 $ 1,448
$ 10,000 $ 11,400 $ 1,400
$ 12,000 $ 13,340 $ 1,340
$ 14,000 $ 15,188 $ 1,188
Table 1: Spend, Revenue andProfitatvaryingbudgetlevels.
There are twootherkeypointsthat I wishtomake before endingthisdiscussion:
Don’tget blindsidedbyrules:Theoretically,if Isimplybidbythe rule thatI shouldbideverykeywordto
the positionof maximumprofitabilityIwouldbe able toreachthe conclusionasthe modelsbased
portfolioapproach; Ishouldspend$8,000 for maximumprofitandwouldget$9,448 in revenue.
However, you wouldneverknowaboutthe tradeoffsyouare makingbymakingthis rule andthat in
our opinionisthe more importantquestion.I’ll askagain: Wouldyoube willingto forego$260 in profit
for an additional $5,740 in revenue ? The discussionalsoassumesyouhave excellentmodelstocome
to rightconclusion,whichbrings me tomynextpoint
Make sure youhave great keywordmodels:Havingaccurate keywordmodelsiscrucial tooptimize your
keywordset.Poormodelswouldleadtowrongbiddingdecisionswhichcouldadverselyaffectyour
business.Goodmodelsare importantforrevenue maximizationbutare absolutelycrucial forprofit
maximization.Considerforexample,thatthe revenue model atthe $4,000 spendleveloverpredicts
10%. The revenue wouldjumpto$$5,706 and the profitwouldbe estimatedat$1,706, the higestin the
curve.If you were profitmaximizingyouwouldpickthisspendlevel andmake $5,188 inrevenue.The
correct decisionwouldhave beentopickthe $8,000 spendlevelfor$9,448 in revenue.Thisdecisionjust
cost you$4,260 in revenue !