How to Measure the Profitability of Google AdWords
by Chris Peer on Thu, Mar 06, 2014 @ 11:26
Anyone who has ever taken an accounting class knows that the basic formula for ROI is the following:
ROI = (Profit – Cost) / Cost
This is pretty simple and straight forward but things get a little murky when you try to define what the cost actually is in a lead generation campaign. There are three different ways to calculate the ROI for a pay per click (PPC) marketing campaign.
Return On Ad Spend
The Return On Ad Spend (ROAS) is what most marketers are referring to when they talk about their PPC campaigns. ROAS is calculated by taking the PPC revenue and subtracting the PPC cost divided by the PPC cost, expressed as a percentage.
ROAS = (PPC revenue - PPC cost) / PPC cost
Here is an example:
Let’s say your PPC revenues are $2,000 and your PPC costs are $1,000. Your ROAS would be 100%
(2,000 profit – 1,000 cost)/1,000 = 1.0 or 100%
The main benefit of using ROAS is its simplicity. Most marketing managers can perform the calculations in their head.
Return On Investment
This is very similar to ROAS where you take (Revenue – Cost) / Cost, but in this case "cost" can be defined differently. PPC costs are not the only costs to take into consideration. There are order processing fees, the cost of returned products, and even the cost of the employees that process orders.
If your AdWords campaign is focused on lead generation, you will still have other costs to consider. Items like website maintenance, the cost of servers and others will add to your overall cost. If you truly want to get an accurate ROI on your lead generation efforts, you will need to expand the definition of costs.
Profit Per Click/Impression
Profit per click or per impression is a little harder to calculate than the previous two methods. Whether you are using your marketing efforts for sales or lead generation, you should be able to calculate this type of ROI.
To do this you will need some extra data. You will need the number of impressions or clicks, as well as the costs and revenues for a particular AdWords campaign.
Profit per Click or Impression = (Profits - Costs) / Number of Clicks or Impressions
To calculate profits, you need to subtract the costs from the profits. Once you have this number, you need to divide profits by the number of clicks or impressions. At this point you can decide to continue with this campaign or try something else.
There is no one best method to calculating the ROI of your lead generation efforts. The key is to choose one method and stick to it.