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Pay Per Click ROI Measurement

pay-per-click-roi-measurement

Pay Per Click ROI Measurement

Running a successful PPC campaign is not just about generating sales, or conversions but factoring in the associated costs and determining if the campaign made the desired results. Many marketers ignore this aspect of PPC campaigns. The reason is that they are content as long as the promotion produced substantial sales. It should not be the case because evaluating a PPC ROI is critical to deciding whether you will launch other such campaigns in the future. The text below elaborates on the subject and the different ways of measuring PPC ROI.

What is PPC ROI? 

ROI is an acronym for return on investment and is the most common way of calculating the returns made on an ad campaign. It is calculated using the formula (profit-cost)/cost. However, since the PPC costs incorporated in this formula do not include expenses related to product costs, credit processing, commissions paid to salespeople or customer service costs, ROI does not provide a holistic view. Instead, it explains the returns made on an ad spend, i.e., ROAS. This kind is calculated by subtracting the PPC revenue from the PPC cost and divided by the PPC cost. We look at an example to understand both concepts better.

A lead generation website sells leads to lawyers; you want to know how much you made in the last 30 days. According to your AdWords, you spend £17,547 on the campaign, which generated 489 leads. 375 of those leads were sold to the lawyers for £130 per lead, which means you made £48,750 in revenue. If you divide the return by the ad spend, you will get 278%, i.e., for every pound you spend on advertising, you made £2.78. This is just a superficial return as you have not accounted for other costs. For example, you may have engaged an agency to run the ads at a cost of £3,000 per month and are using software whose total expenses are £600 per month.

It means your total spend increases to £21,147. Therefore, your ROI reduces to 231%. While ROI has reduced, the income remains the same. If you are providing a report to management, it is important to show them how you are calculating the ROI. Factoring all such features allows you to focus on adjusting your PPC campaign to meet targets and monitor performance over a specific period.

Ways of Calculating PPC ROI 

Most account managers use the ROAS metric in bid optimisation algorithms, though it does not provide the true cost of running a PPC campaign. Here are the different ways of calculating the PPC ROI.

Calculate the Break Even ROAS 

ROAS does not provide comprehensive information as to whether the company is profitable or not. Therefore, an account manager needs to determine if the campaign is breaking even. You can do this by calculating the profit margin first and dividing it by 1 (1/profit margin). Costs included in the calculation of profit do not comprise expenses to do with taxes, rent or other overhead costs; you only need to use expenses associate with the delivery of the service (e.g. cost of developing the ad). The break-even point tells you how much revenue you need to generate to make a pound in profit. Thus, if the campaign is making less than the break-even ROAS, you are making losses.

Most clients expect to make more money that they are spending over time. However after accounting for profit margins, they seem to make losses. In such a scenario, calculate the lifetime value of the client’s customers to increase the profit margins and reduce the break even ROAS.

Calculate the Profit Per Click and Profit Per Impression 

PPC ROI involves identifying the best way to maximize profit by generating the most sales and visitors at the best cost. Profit per impression is a concept that was introduced by Brad Geddes of Certified Knowledge to provide a more holistic view of PPC ROI. It removes the ambiguity that comes with identifying profits generated as a result of conversions and those caused by the click-through rate. It also factors in all the features related to making a conversion- using suitable keywords, generating clicks at an affordable cost, displaying ads in front of the searchers and converting visitors to buyers. Thus, profit per impression provides a more accurate metric by leveraging on the number of impressions and factors in what matters most- the ROI. It is calculated using the formula (revenue-cost/Impressions multiplied by 1000).

Determine the Cost per Conversion for Forms 

Most account managers factor in track form submissions as conversion actions. It should not be the case as form submissions don’t always generate revenue. The bottom line is to determine the cost of converting the customer and the resulting sale. To determine CPA for submission forms calculate:

• The average cost per conversion (cost per form submission)
• The average rate of conversion caused by form submission
Divide the average cost per conversion by the form conversion rate to determine the ROI. The result helps identify areas the client can leverage to increase the ROI with more certainty. Additionally, you can determine the rate at which the sales team should convert to reduce the cost per conversion.

Determine the Break-even CPA for the Submission Forms

You also need to determine the amount you can spend on form submissions hence, the need to calculate the break-even point. To do this, you need to multiply the average profit per sale and the form conversion rate. If the client’s sole goal is to generate profits, he may lose to the sales he can make per submission. Consequently, he should be willing to reduce the profit margins for the sake of acquiring more customers and increasing sales volume.

Conclusion 

Clearly, there are different ways of calculating ROI. Advertisers can only choose one method and stick to it to achieve the best results. Using too many metrics can be confusing especially if you are working with budgets and strict deadlines. Remember the ROAS provides a pretty narrow view of PPC ROI, hence, the need to factor in all costs associate with developing the ad and converting visitors to buyers.

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Vanessa Simms
Vanessa writes on a range of subjects for the Search South blog, but has a strong focus on her core interest area of Google AdWords management best practices.