Optimization Pt. 2 of 2

Optimizing Shopping Comparison Engines from a financial perspective brings in many more variables. For our purposes here, we will assume commission based selling is not being accounted for. Commission based selling on Amazon, PriceGrabber Stores, or using Shopping.com’s Wallet System is a different animal.

To make this readable, lets take 2 perspectives.

1) The simple perspective: ” I need to make more money. How do I do that?”

Using this outlook, it is best to consider a straight forward profit and loss equation, assuming the best product data in already being used (see Optimization Pt. 1)

2) The more complex, and in some cases, best perspective: “Understanding that bidding may play a significant role in achieving the best results, how do I maximize profits?”

This outlook understands the all important variable of bidding. When items are are listed at a set cost, a proper formula is easier to construct. However, when factoring in bidding as any user of SEM or Google Adwords - Overture/Yahoo based advertising knows, can significantly impact profitability.

So lets take a look at both scenarios:

1. The simple strategy

The most important thing to understand here is the need for product level tracking and reporting. Seeing whether an entire feed or even category is profitable does not provide accurate enough information to truly get good results. The cummulative effect of all products is important, but without being able to take apart the engine that drives profits, there is no good way to fine tune the engine for performance.

Using a simple formula like this should suffice:

X= listing price of the item (cpc)
Y= profit from a sale (selling price - cost of the item to the merchant)
N= number of sales
C= number of clicksN*Y - (C*X) =

So, for a sample product, lets imagine a futon bed:

X= $.35 per click for listing the item online
Y= $90.00 ($199.00 selling price - 109.00 cost of goods)
N= 3 sales through using an engine
C= 125 clicks generated through the engine over a given time range

$90.00*3 sales= $270.00 in profit
275 clicks * $.35 per click= $96.75

Net profit or return on investment (ROI) in advertising the futon= $270.00-$96.75= $173.25

Using this scenario, this is where profit and loss is essential. The conversion rate in this scenario is a low 1.09%, however the profit is significant.

Using this equation, you want to sum all products to see how the engine is doing as a whole, but of course any product which has a negative or unsatisfactory profit level, would be removed from the feed.

2. Look Deeper

Looking a little closer, many engines allow product level bidding. This increases the variables one step further allowing for increasing and decreasing bidding based on a products performance. This requires an analysis of bidding and results over time and with different variations.

Lets assume over a given time range, we have changed the bid on a product and measured the ROI (all other variables kept constant). This change in bid structure has resulted in high visibility in some cases, and low visibility in other cases. So the results are as follows:

In this scenario, more clicks through more traffic but not necessarily more sales. For this product, $.45 would be the optimum scenario. However,continual testing should be done because in a real world environment, other merchants would also adjust their bids resulting in changes in exposure.

ROI is one method for determining profitability. Many retailers use different qualifiers for success. We have already covered ROI, but there is also:

-Cost Per Acquisition (CPA): Total Advertising Cost/Number of Sales
-Return on Ad Spend (ROAS): Revenue Made in Sales/Amount Spent on Advertising
-Conversion Rate: Total sales/Divided by Total Number of Clicks

The following depicts how these products from the first example would show using these indicators:

Across hundreds or thousands of products, an ideal solution would be to continually adjust bid and data values. If a product continually under-performs across a determined time period, then that product should be discontinued or bidding should be set to zero. Using this type of process, return can be gradually increased even if overall traffic and clicks may actually decrease. An increase in profit does not always mean an increase in sales or traffic. Sometimes efficiency is quiet but will keep you in business and lead to success in long term where it matters most.

July 16th, 2007