Understanding ROI For Your AdWords Campaign
A positive Return On Investment (ROI) is critical for any business. Businesses require profit to be able to survive and flourish. The beautiful thing about online advertising is that it is much easier to calculate advertising ROI than conventional marketing because most of it can be tracked using web analytics services like Google Analytics. In this article, we’re going to dive into how you can calculate ROI for your e-commerce AdWords campaigns. Profit margins vary considerably and knowing that your campaign is generating revenue and more importantly, generating a profit is crucial to your ability to grow and reinvest back into the business and advertising budget.
The ability to track revenue from different online sources is crucial to understanding your online marketing efforts. If you are only looking at revenue within your shopping cart, you are losing out on valuable insights. A favorite tracking tool is Google Analytics. It integrates excellently with AdWords and is quite powerful. Check out AdWords Conversion Tracking For E-commerce after reading this article to see how you can track revenue from AdWords.
Calculating ROI for online marketing is not that straightforward because of all of the different factors we need to consider. Last Click/Direct Conversions is important to consider, but it doesn’t tell the whole story. Assisted Conversions and AdWords tracking gives us a much better understanding of the impact the campaign is having.
ROI = ( revenue – cost ) / cost. The “cost” in this equation is the cost of your AdWords campaign. For example your campaign generated $1000 and cost $200 in AdWords, the ROI is calculated like this
- 1000 – 200 = 800
- 800 / 200 = 4
- 4 x 100 = 400%
Multiplying by 100 makes it into a percentage. In this scenario, your ROI would be 400%.
The above equation doesn’t take into consideration the cost of the goods. If your profit margin is 20%, the above example would have given you an ROI of 0%. (I state “True ROI”, but one needs to consider other costs too, like if you offer free shipping. For the example of true ROI, we’re only going to consider the cost of goods).
To calculate the true ROI you have to take into account the cost of the goods. This is key because if you have no profit from the campaign, what’s the point? Worse, would be if you’re losing money and you don’t even know it.
True ROI = (revenue – cost of good sold – AdWords cost) / AdWords cost. Another way to calculate it is (revenue x profit margin – AdWords cost) / AdWords cost. Using the above numbers, let’s calculate the true ROI
- 1000 – 800 – 200 = 0
- 0 / 200= 0
- 0 x 100 = 0%
Considering the cost of goods, we can see that the campaign needs some work before it becomes profitable. Running on 20% margins is very thin. Let’s use an example where the margins are 50%.
- 1000 – 500 – 200 = 300
- 300 / 200 = 1.5
- 1.5 x 100 = 150%
Profit generated = $100. ROI percentage = 150%
Which Revenue Data to Use?
Using data from either the AdWords conversion tracking or Assisted Conversions will provide you the “truer” picture that your AdWords campaign is having on revenue. Depending on the products that you sell and the type of competition you have, AdWords may be playing a bigger role in assisting conversions rather than driving sales directly.