Demystifying Google Shopping, a Sleeping Giant for Online Sales

Of the hundreds of retailers that submit a request form on our homepage, only 29% have their own webstore. Of those retailers, we estimate that only 25% use Google Shopping. In other words, using our data as a heuristic, only 7 out of every 100 small and mid sized retailers are using Google Shopping. Considering the millions of product searches that occur every day on Google.com, this sure sounds like an opportunity, doesn't it?

Why such low participation?

Google Shopping is scary! More than just being complicated to implement and optimize, it's really easy to waste money using Google Shopping.

Throughout the first quarter of 2016, we've been speaking with a lot of retailers trying to get a feel for the way in which Google Shopping is most commonly implemented. One of the most concerning things we learned is that 3rd party marketing firms are charging a commission of 20 to 35% of ad spend -- this is a common pricing model for paid search services. This makes absolutely no sense. The marketing firm is incentivized to grow your marketing budget, where is the accountability?

Marketing firms need to be aligned with their retailer clients. The model should be a % of revenue attributable to the Google Shopping campaign. Going one very important step further, the marketing firm needs to be held accountable for implementing a profitable strategy.

Customer Lifetime Value (CLV)

Customer Lifetime Value is, in our view, the most important metric when determining the appropriate strategy and budget for acquiring new customers. CLV is the profit - on average - a customer will contribute to your business.

As a crude heuristic, if your average gross profit per order on your first party website is $10 and you receive 1.1 orders per customer, then your customer lifetime value is $11 ($10 x 1.1). This means you should be willing to spend no more than $11 to acquire a new customer. If you pay more than the value a new customer will contribute to your business, then you are destroying value.

Think about Google Shopping as a Cash Machine

It helps to think of Google Shopping as a cash machine; you want every dollar invested to yield at least $1 in gross profit. Just recently, we implemented a data-driven Google Shopping strategy that currently yields $3.20 in gross profits for each $1 of ad spend.

Think about Google Shopping ad spend as effective commission

If you sell on Amazon as a 3rd party marketplace seller, chances are you're paying Amazon roughly 15% commission depending on the product category. So, for every $100 in gross sales, you receive $85 net of Amazon's commission.

You want to think about Google Shopping ad spend in much the same way. If you spend $10 on ads which generate $100 in revenue, then your effective commission to Google Shopping is 10% ($10/$100 = 10%).

Google Shopping should really be thought of as another major marketplace, except you need to pay to play.

Dumbing down Google Shopping into its component parts

Let's say you spend $15 on Google Shopping (via Google.com/Adwords) to buy 30 clicks. Your average Cost Per Click (CPC) is $0.50. Now, let's say 2 of those clicks result in sales of $100. Your average order value is $50 ($100/2) and your conversion rate is 6.67% (2/30).

Optimizing for profitable first party sales

At the end of the day, there are a few things to focus on in order to ensure your Google Shopping campaign is as successful as possible.

1. Data. If you have a SKU that converts 3% of the time and gross profit is $10, then you should be willing to bid no more than $0.30 per click. $0.30 x 100 clicks = $30 in ad spend, 3 conversions @ $10 gross profit = $30 in gross profit on 100 clicks.
2. Conversion Rate. If you can double your conversion rate, then you can double your revenue on the same ad spend. You can also double your ad spend...
3. Customer Lifetime Value. Do things that grow the number of transactions per unique customer. Market to them consistently, frequently. If you grow your CLV, then you can invest more in customer acquisition. It's a virtuous cycle.

Key concepts:

• Customer Lifetime Value (CLV): the gross profit contributed by a customer; average # of transactions per customer x average gross profit per transaction.
• Cost Per Click (CPC): the average bid paid to Google for a click through to your website.
• Conversion Rate: % of clicks that result in a transaction on your website. If your conversion rate is 3%, then 3 out of 100 visitors places an order on your site.
• Gross Profit: we consider gross profit to be your profit net of ad spend, item cost, and shipping. So, if you generate an order of $100 and your cost is $50 for the product, $15 for the ads, $10 for shipping, and $3 for merchant processing, then your gross profit is $22 ($100 - $50 - $15 - $10 - $3 = $22)