Calculating ROI is one of the basic tenets of PPC, and yet many advertisers don’t consider it or even understand it. A lot of advertisers perform campaign optimizations based solely on conversion rate or cost per conversion, choosing the ads and keywords with the best metric and calling it a day.
This might be sufficient if you’re collecting leads and not selling goods. You’ll probably end up with more leads in the end. But even if you’re just using PPC for lead generation, you should still calculate the return on your advertising investment.
So what are the different ways to calculate PPC ROI?
Before we get into that, let’s define ROI. It stands for return on investment. The term comes from the finance world and will sound familiar to you if you’ve ever taken accounting. Strictly speaking, ROI is calculated as such:
(Profit – Cost) / Cost
The sticking point comes in how cost is defined.
Return on Ad Spend
When most advertisers talk about ROI, they’re actually referring to ROAS, or return on ad spend. ROAS is simply PPC revenue minus PPC cost, divided by PPC cost. It’s usually shown as a percentage.
For example, if your sales from PPC are $1,000, and you paid $500 for PPC click costs, your ROAS would be 100 percent:
($1000 profit - $500 cost = $500) / $500 cost = 1.0 = 100%
The beauty of the ROAS calculation is in its simplicity. PPC managers can often perform the calculation in their heads, making it easy to perform optimization on the fly.
Many bid management platforms calculate ROAS and use the metric in bid optimization algorithms. ROAS is a great place to start for calculating PPC ROI.
Return on Investment
If you look up the definition of ROI, it looks a lot like the definition for ROAS: profit minus cost, divided by cost. The difference is in how cost is calculated.
PPC click costs aren’t the only cost to a PPC campaign. In ecommerce, there are costs to make the products and fulfill the orders. There are credit card processing costs and the cost of returned goods. You also have customer service costs – the salaries of the people who answer phone and email inquiries.
Even in lead gen, where you’re not selling physical products, there are still costs. Consider fixed costs such as those that keep your website running: servers, equipment, and technicians. What about the salaries of the salespeople who follow up on all those leads? What about the cost for marketing automation?
The point is, to truly get an idea of the cost of advertising, you’ll need to factor in all the costs, not just click fees. When I did in-house ecommerce PPC, we had a formula to assess marketing programs that took all costs into account, and we applied it across the board.
Profit Per Impression and Profit Per Click
Even if you’ve accounted for all the costs to sell products or generate leads, you’re still missing a big part of the picture. PPC is about maximizing profit by generating the most visitors and sales at the best cost. That’s why I’m partial to using profit per impression and profit per click.
Introduced by Brad Geddes of Certified Knowledge, the profit per metrics take a holistic view of the search process. Conversions don’t happen in a vacuum – they require choosing the right keywords, getting ads in front of searchers, obtaining clicks at a good cost, and ultimately turning visitors into buyers.
Profit per impression/click is a little trickier to calculate than ROI and ROAS, but once you understand these metrics, they’re easy to generate in a spreadsheet.
You’ll need data for impressions, clicks, total cost, and total sales value. To calculate profit, simply subtract the total cost from the total sales value. (It’s up to you whether you factor in overhead costs, as described in the ROI section.)
To calculate profit per impression, divide profit by impressions; for profit per click, divide profit by clicks. From there, you can decide whether to roll out with the ad or keyword with the best profit-per, or conduct further testing as outlined in Geddes’ post.
So Which Method is Best?
As with so many things in PPC, there isn’t one best way to figure out if you’re making money on PPC. Across our client base, we’re using all three metrics in one way or another.
The important thing is to pick one method and stick with it. Don’t flip back and forth between metrics, or they’ll quickly become meaningless.
Do you have a favorite way of calculating PPC ROI?
ClickZ Live San Francisco (Aug 11-14) will bring together the industry's leading online marketing practitioners to deliver 4 days of educational sessions and training workshops. From Data-Driven Marketing to Social, Mobile, Display, Search and Email, the comprehensive agenda will help you maximize your marketing efforts and ROI. Register today!