I'm setting up an adwords account for a client. Here are the figures:
Adwords spend last month $660 - generated sales of $1680.
Profit margin on products (before overheads) 45%
So... (I hope I'm getting this right) - the sales of $1680 generated a gross profit (45%) of $756 - meaning I can safely increase the daily budget on adwords and (probably) increase sales.
BUT
Profit margin on products (AFTER overheads) are 20%
So the sales of $1680 generated a net profit (20%) of $336 - meaning I'm losing money on the sales?
As you can see I stuck on a very basic profitability question - please help!
Sun
You have two kinds of costs in this scenario: Fixed and Variable. Fixed costs equal your overhead. You pay this no matter what. (Rent, salaries, etc.) The variable costs are your adwords spending and cost of inventory (advertising, cost per additional unit of inventory, etc.)
You say that overhead results in a 20% decrease in your profit margin. In theory, since overhead is FIXED, the percentage of profit margin of your overhead will DECREASE as you sell more units. Here is an example using your numbers:
CURRENT SCENARIO:
Sales ($10/unit x 168 units sold): 1,680
COGS/Adwords ($5.50/unit x 168)= VARIABLE: 924
Gross Profit (45% gross profit margin): 756
Rent, Salaries, Overhead, etc. = FIXED: 420
Net Income (20% net profit margin):336
INCREASE ADWORDS SPENDING:
Sales ($10/unit x 500 units sold) 5,000
COGS/Adwords ($5.50/unit x 500)= VARIABLE 2,750
Gross Profit (45% profit margin): 2,250
Rent, Salaries, Overhead, etc. = FIXED 420
Net Income (37% net profit margin) 1,830
So, in conclusion, as long as you keep you Fixed costs more or less fixed AND keep the same cost per conversion % in adwords, it makes sense to increase your adwords spending. The 45% gross profit percentage needs to stay constant though.
