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The crucial first step to producing positive ROI

The crucial first step to producing positive ROI

Whatever form of marketing activity you have in mind, you are probably looking to produce a positive return on investment (ROI). But have you got the foundations in place, so that you can reach that objective? In this article, I’ll show you how to make the perfect start.

The crucial first step to producing positive ROI Click To Tweet

Do you know what ROI really means?

It’s a stupid question, of course! You understand, as I do, that ROI refers to Return On Investment. It’s a means of measuring how much you get back from a particular investment. In digital marketing circles, we often talk about ROI in relation to a particular advertising channel. So, clients might well consider what sort of ROI they would get from a Google AdWords campaign? In order to provide an answer to that question, it’s important that we understand how we would measure this specific metric. Perhaps surprisingly, that’s nowhere near as simple as it first seems!

Measuring Google AdWords ROI

Let’s say that, over a period of time, you have spent £1,000 advertising on the Google AdWords platform, producing £2,000 of sales as a result. Putting to one side how we measure that those sales were genuinely created by (and hence should be attributed to) AdWords, let’s look at the underlying mathematics:

Total spend: £1,000
Total sales: £2,000

So what’s the ROI? Is it 100%, since your sales are exactly double the spend? Is it another figure? The answer is: we don’t have enough information here to say.

But this highlights the classic problem with ROI calculations: many of us tend to run through them without having the data to hand.

How do we run the calculation then?

In the case of AdWords, there are 3 main figures that you need. Let’s assuming that you are selling a product (since that makes the calculation a whole lot easier). You need:

  • The AdWords cost of advertising
  • The total value of sales
  • Costs associated with production, customer service, managing Adwords, delivery (if free delivery is offered or this figure differs from any delivery charge applied to orders

Let’s work through our example again:

  • It has cost us £1,000 to advertise via AdWords
  • The total sales value was £2,000

Now for the tricky (but most important bit!), what were the other costs? Let’s run through some sample figures:

  • The £2,000 worth of products (as sold at retail price), actually cost us £400 to purchase wholesale
  • We subsidise the delivery charges, meaning that we spent an additional £50 on delivery costs
  • Staff time within the warehouse, customer services, bookkeeping etc amounts to a further £150
  • We spent a further £100 managing the AdWords spend (via in-house staff time, or a limited amount of AdWords consultant time).

So, this means that the “other costs” amount to £700. Adding that to the AdWords spend gives us total costs of £,1700. Our calculation now starts from this point:

  • Total sales: £2,000
  • Total cost of sales: £1,700

The return on investment would be: (Revenue – cost of goods sold) / (cost of goods sold)

In this case, that would be: (£2,000 – £1,700) / (£1,700) = 17.7%

Where some advertisers would have suggested that the ROI on the AdWords advertising here was equivalent to 100%, the actual figure was under 18%. That’s quite a difference!

Accurate measuring of AdWords campaign performance: without it, you're spending blind. Click To Tweet

What can we takeaway from this post? Well, firstly measure and understand your costs! Secondly, feed them in to your ROI calculations. That’s the only way to monitor the profitability of your campaigns. Of course, we also need to talk about measuring ROI at the product or service level, but that’s for another day!

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Keith Barrett
With more than 15 years of digital marketing experience, Keith Barrett is a fully Certified Google AdWords Partner. Offering insights into the world of PPC marketing in the UK, Keith is a Senior Consultant here at Search South. If you'd like to hear more of Keith's thoughts, then you can subscribe to our newsletter.