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| Download Free ROI Calculator |
The term 'conversion' refers to converting from leads to customers or users of your service. So if someone clicks to your site and buys something, that click is a conversion from a site visit to a sale. Other conversions you might want to track are page views or signups. Advertising is only effective if it generates measurable results for your business. Paid search is an investment of time and money that you use to drive customers to your website. In this lesson, the resulting conversions are called your return on investment, or ROI. ROI can also be called Return on Ad Spend, or ROAS. Your ROI can be calculated as revenue from sales, minus advertising costs, all divided by the cost of advertising. For example, if your advertising costs for the past week were US$500 and you've sold US$1,000 worth of inventory as a result, you have a 100% ROI for the week ((US$1000-US$500) divided by US$500). To express ROI as a percentage, you multiply the result of this formula by 100. Determining your ROI can be a very straightforward process if your business is after web-based sales. If you use Google Adwords, you'll already have the advertising costs for a specific time period for your AdWords account in your Campaign Summary statistics. You can also create reports via the Report Center. The net profit for your business then be calculated based on your company's revenue from sales made via your advertising, minus the cost of your advertising. Dividing your net profit by the advertising costs will give you your ROI for that period in time. In other cases, your ROI may require a different formula. For example, if you're interested in calculating the ROI for a page view or lead, you'll have to estimate the values of each of these actions. For example, a Yellow Pages ad for your business may cost US$1,000 per year and result in 100 leads. Ten of those leads become customers, and each customer provides an average revenue of US$120. The value of each lead is therefore US$12 (US$1200 revenue/100 leads), and your ROI for the Yellow Pages ad is 20% ((US$1200 revenue minus US$1000 spent)/US$1000 advertising cost) x 100. A simple alternative to estimating values for your leads and page views is to use a cost-per-acquisition (CPA) measurement. This method will allow you to focus primarily on how your advertising costs compare to the number of acquisitions those costs deliver. Using the Yellow Pages example again, your ads may cost US$1,000, resulting in 10 sales: therefore, your CPA for those ads is US$100. Your CPA should not exceed your profit derived from each acquisition. In the case of the Yellow Pages ad, the CPA is 20% less than the revenue the acquisitions provide. ROI Example - Camera Shop Ultimately, your ROI calculation will help you determine the best way to spend your advertising dollars. For instance, if you represent a camera shop that sells photography equipment and provides photography classes, the keywords 'photography' and 'photography classes' could both potentially be valuable to you. However, how would you determine which keyword would have the greater potential ROI for your business? Assume that you have a US$100 daily advertising budget. The keyword 'photography' generates 110 clicks, resulting in US$120 in sales, but it also costs you US$60 a day. This results in an ROI of 100% for that keyword. The keyword 'photography classes' uses only US$25 of the daily advertising budget, but generates 40 clicks. These clicks result in US$90 in sales, with an effective ROI of 260%. This advertiser would be better served allocating more of their budget to the 'photography classes' keyword because of its higher ROI, despite the potential for fewer clicks for this keyword. |
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