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)