As a business owner, you’ve spent countless hours thinking of sales figures and balance sheets, cost overruns and budgetary conflicts. You understand what makes your business run in the real world, but what about the digital environment? That’s where a great deal of your actual business takes place – whether you know it or not. And, one of the biggest differences between the brick-and-mortar world that you’re used to and the digital realm of search marketing is measuring return on your investment.
No matter what your intention for using AdWords, be it lead generation or driving another as-important customer action, you’re going to want a good, reliable way to measure your specific return on investment (ROI). It’s the only way you can truly know whether the platform is working for you and if it’s the proper place to continue investing on behalf of your business. After all, the whole point of the platform is profit, so measuring it accurately is just as important as the clicks themselves. Well, maybe a bit less, but you get the point.
How ROI Functions
The first thing to recognize about ROI is its dependence on the goals you set for your campaign. These goals will determine the exact way you measure your ROI – your ratio of profit to cost – to understand the real effects your advertising efforts are having on your business’ bottom line. Let’s take a moment and look at an example where ROI is defined like this (Revenue – Cost of Goods Sold) / Cost of Goods Sold = % ROI:
Your product costs an even $100.00 to produce and you can sell it for $200.00 even. That’s $100.00 profit from each sale before your overhead is figured. Now, you spend $200 on AdWords advertising and those clicks led to 5 sales of your product. If we figure the 5 products cost $500.00 to produce and factor in the additional $200.00 to sell via AdWords your total costs were $700.00. You made $1,000.00 from the sales. That gives you a ROI of $300.00 – thus you made a profit. Here’s the same math in proper form: ($1,000 – $700) / $500 = $300 / $500 = 60%
That means in this specific example you’re getting a 60% return on your investment. So, for every single dollar you spend in AdWords, you’re getting $1.60 back. That’s a good return in any book.
There’s also an important distinction to be made when discussing ROI from AdWords spend regarding physical products and lead generation. When calculating ROI with physical product sales, you have to factor in the cost of producing said product in your formula. This is commonly known as cost-per-conversion, or CPC. When you generate leads, you only calculate the costs of advertising. This is known as cost-per-acquisition, or CPA.
When you run a business, you come to realize that no detail is unimportant. You learn quickly, if you want to remain in business, that everything you learn from your customers and from data related to their activities has intrinsic value. ROI is no different. By paying close attention to your ROI from AdWords, you can focus your efforts in areas where the numbers are better, where your ads have more impact, and where your ROI is highest. That’s the best path to profit and, when done in coordination with the expert AdWords team at Lift Conversions, can take your business to a whole new level of success.
Setting Conversion Goals
Okay, so we’ve covered what ROI is and how important it is to your bottom line, but we only lightly scratched the surface when it comes to setting goals – the fuel that fires the ROI engine. These goals can be a variety of actions completed by customers that you find valuable to your business: purchases, newsletter signups, specific page visits, leads, etc. They can vary from client to client and will determine exactly how your ad campaigns are structured. AdWords has a free conversion tracking tool that gives an easy visual representation of what’s happening and why. For a more thorough analysis, you’ll need a professional like the team at Lift Conversions to explain the nuance found inside the system. We recommend every client we work with install Google Analytics on their site to properly track all visitor actions. It’s truly the best way to understand all the moving parts in any real, actionable way.
Time to Get Started
Once you’ve made the decision to begin advertising with Google, and chosen your conversion goals, we can start to run your ads and get that all-important data back. This data, along with the information we’ve provided here, is all you need to properly measure your ROI and better understand what’s working and what isn’t. Remember, as long as your conversions are less expensive than your profits from the sale of your goods or services, your ROI will be at an acceptable level. Professional management from Lift Conversions ensures your ads are the best they can be at all times, targeted to only the specific areas you want, and costs are kept to a comfortable level while still bringing in the conversions that make the whole process worthwhile. So, what are you waiting for? Make the call to Lift Conversions and let us help you make it happen. There’s no better time to get in the game.
Understanding ROI is the ratio of your net profit to your costs. It's typically the most important measurement for an advertiser because it's based on your specific advertising goals and shows the real effect your advertising efforts have on your business. The exact method you use to calculate ROI depends upon the goals of your campaign.
One way to define ROI is: (Revenue – Cost of goods sold) / Cost of goods sold
Let's say you have a product that costs $100 to produce, and sells for $200. You sell 6 of these products as a result of advertising them on AdWords, so your total cost is $600 and your total sales is $1200. Let's say your AdWords costs are $200, for a total cost of $800. Your ROI is:
($1200 – $800) / $800
= $400 / $800
In this example, you're earning a 50% return on investment. For every $1 you spend, you get $1.50 back.
For physical products, the cost of goods sold is equal to the manufacturing cost of all the items you sold plus your advertising costs, and your revenue is how much you made from selling those products. The amount you spend for each sale is known as cost per conversion.
If your business generates leads, the cost of goods sold is just your advertising costs, and your revenue is the amount you make on a typical lead. For example, if you typically make 1 sale for every 10 leads, and your typical sale is $20, then each lead generates $2 in revenue on average. The amount it costs you to get a lead is known as cost per acquisition.
Google AdWords Cost/Profit Calculator (Try it Here)