Calculating ROI is one of the fundamental aspects of PPC, yet many marketers fail to even consider or comprehend it. Many marketers perform campaign optimizations based upon cost-per-conversion and conversion rates, selecting the ads and keywords with the top metric and leaving it at that.
This can work if you’re generating leads and not selling a product. You’ll be able to focus on leads and will probably end up with more at the end of the campaign. But even if you’re using PPC solely for lead generation, it is still important to calculate the return on your investment.
After all, isn’t the sole purpose of PPC to generate as many conversions for the best price? With this notion in mind, it’s important to be able to quantify your success.
What is ROI?
ROI stands for return on investment. The financial term is calculated as such:
Profit – Cost / Cost
And how do you define cost?
When most marketers discuss ROI, they’re really referring to ROAS, or return on ad spend. ROAS is PPC revenue minus the PPC cost, divided by PPC cost. It is typically displayed as a percentage.
For example, if your PPC sales are £3,000, and you paid £1,500 on PPC click spend, your ROAS would be 100 percent:
(£3,000 profit – £1,500 spent = £1,500) / £1,500 spent = 1.0 = 100%
The awesome thing about ROAS calculation is its simplicity. PPC marketers can often do these calculations on the spot, without a calculator, allowing them to perform optimization on the go.
So, how are some of the ways you can calculate your PPC ROI?
Return on investment
If you consider the definition of ROI, it is very similar to that of ROAS: profit minus cost, divided by cost. The difference lies in how the cost is defined.
PPC click spend isn’t the only cost pertaining to a PPC campaign. In eCommerce, there are costs involved to manufacture products and deliver goods. There are costs of returned goods and credit card processing costs.
When it comes to lead generation, you still have to consider fixed costs like those that keep your website running: equipment, servers, and technicians. Then there are the salaries of people who follow up the leads.
So what does this mean for PPC?
Well, to truly understand the overall spend on an advertising campaign, you have to factor in all costs, and not just that of click spend. You have to consider all costs and apply those across the board.
Profit per impression & profit per click
Even if you’ve accounted for all the costs to generate leads and sell products, you’re still leaving out an important aspect. PPC is about optimizing profit by generating the most visitors and conversions for the best price. This is why you might want to consider using profit per impression and profit per click.
This metric completely encompasses the search process. Conversions require obtaining clicks for a good price, choosing the right keywords, getting ads in front of searchers, and converting visitors into spenders.
Profit per impression/click is a little more difficult to calculate than ROAS or ROI, but once you get the hang of it, they’re easy to calculate using a spreadsheet.
First, you need data on impressions, clicks, total cost, and total sales value. To calculate your profit, all you have to do is subtract the total cost from the total sales value. It’s then up to you whether you want to factor in overhead costs, as described above.
To calculate profit per impression, divide overall profit by the number of impressions. For-profit per click, divide profit by clicks. From here, you can then go on to decide whether to continue with the keyword or ad with the best profit per impression/click or continue with further testing.
What is the most efficient method?
As with all things PPC, there isn’t anyone way to know whether you’re getting the best value for your money. It’s important to choose one of the above methods and stick to it.
You don’t want to jump between methods, as this will only convolute what you are trying to understand. Your attempts to quantify your PPC success will become confused thus making it a futile endeavor.
Simply pick the method which sounds most relevant to the work you are conducting, and stick with it. Once you get the hang of calculating PPC ROI you should have no trouble measuring a campaign’s success and what requires further testing.