Return on Investment (ROI)

If you use AdWords to increase the number of conversions (sales, leads, downloads, for example), we recommend that you evaluate your return on investment (ROI). You will have the certainty that the budget that you invest in AdWords advertising turns into profits for your business.

What is ROI?

ROI is the ratio of your net income and costs. For example, imagine an investment of € 1,000 and the outcome of that investment was $1,200. So you make a profit of $200. To calculate your ROI, you must perform the following calculation: (1 200-1, 000) / 1000 = 20%, but the method actually depends on the objectives of your campaign. Generally, your ROI is one of the most important indicators because it is based on your own advertising goals and it determines the actual effect of your advertising efforts on your business.

Why is ROI so important?

The ROI calculation lets you know the amount of profit you made in advertising with AdWords ads. You can use this metric to help you determine how to spend your budget. For example, if you notice that a campaign generates a higher ROI than others, you can assign a greater share of your budget to that campaign while reducing the share of the budget for the least efficient campaigns. This data can also help you improve the performance of least effective campaigns.

Use conversions to assess ROI

To calculate your ROI, you must first determine the number of conversions you are having, that is to say, the actions of users who have an interest in your business (a purchase, a registration, viewing a Web page or a lead , for example). The conversion tracking is a free tool that allows you to determine how many clicks generated conversions. You can use conversion tracking to determine the profitability of a keyword or ad, and to monitor the conversion rate and cost per conversion.

Many AdWords advertisers use Google Analytics to track conversions. It is a web analytics free tool  that lets you know how visitors interact with your website.

Once you have begun to assess the number of conversions, you can determine your ROI. The value of each conversion must be greater than the amount you spend to get it. For example, if you spend $ 10 in clicks to make a sale and earn $ 15 on a sale, you have made a profit ($ 5) and you can consider if your AdWords ROI is satisfactory.

Calculating ROI for sales

AdWords ROI calculation is very simple if the goal of your business is to make sales on the Web. The calculation is based on three figures:

  • The turnover through your AdWords ads
  • The costs associated with products sold
  • Your AdWords costs (available in the “Campaigns” tab in your AdWords account)

To calculate your net income, deduct your cost of your AdWords revenue in a given period. Then divide your earnings per your AdWords costs to get your AdWords ROI over this period. Consider an example:

($ 1,300 – $ 1,000) / $ 1,000 = 0,3
Your turnover (determined from your conversions) Your overall costs Your AdWords costs The relationship between your costs and profit is 30%, which corresponds to your AdWords ROI.

Calculating ROI for page views, leads, etc..

To calculate your ROI for other metrics, it may sometimes be necessary to use a different formula. If, for example, you want to calculate the ROI of a page view or prospect, you must determine the value of these shares.

Example

Imagine an ad has been published in the yellow pages to promote your business and it costs you € 1000 per year and generate 100 leads. Of these, ten become customers and each of them allow you to generate a net profit of $ 120 (after deducting your costs). The value of each prospect is $ 12 ($ 1,200 profit net/100 prospects). ROI associated with yellow pages is 120% ($ 1200 net profit / $ 1,000 of advertising costs) x 100.

The formula used in this example is as follows: (total revenue – total cost) / advertising costs x 100 = ROI (in%).

The use of cost per acquisition (CPA) also makes it easy to determine the value of leads and page views. Acquisitions are identical to the conversions, so they are actions taken by your customers that you consider interesting (for example, a purchase or signup to receive additional information).

This method allows you to focus primarily on the comparison between advertising costs and the number of purchases (or acquisitions). To take the example of the yellow pages, imagine that your ad will cost you $ 1000 and generates 10 sales. Your CPA for this ad amounts to $ 100. The calculation formula is as follows CPA (cost / sales) = CPA.

Your CPA should not be greater than the profit you make for each acquisition. 

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