Measuring Return on Investment (ROI)

Whether you are trying to increase sales, generate leads, or drive other customer activity, measuring your return on investment (ROI) is always a good idea. The ROI will help you determine whether the money you are spending towards your AdWords account is reeling in healthy profits for your business.

Understanding ROI

Roi is known to be the most important measurement for an advertiser because it helps the advertiser understand the actual affect his or her advertising efforts are having on their business. ROI is the ratio of your net profit to your costs. The exact method one uses to calculate ROI depends upon the goals of his or her campaign.

The most common way to calculate the ROI is: 

(Revenue - Cost of goods sold) / Cost of goods sold

As far as physical products are concerned, the cost of goods sold is equal to the manufacturing cost of all the items you sold plus your advertising costs, and the revenue is how much profit you will make from selling those products.  Furthermore, the amount you spend for each sale is known as cost per conversion.

Why ROI Matters

As mentioned before, by calculating the return on investment, it it easier to distinguish how much cash inflow has happened by advertising with AdWords. With this being said, you can also use ROI to help you decide how to spend your budget. For example, if you notice one of your campaigns is generating a higher amount of ROI than the others, you can apply more of your specified budget to the successful campaign rather than spend it on campaigns that are not performing so well.

Using Conversions to Measure ROI

In order to begin the ROI process, you must first measure conversions. Conversions are customer actions that you believe are valuable such as purchases, signups, web page visits, or leads. Conveniently, AdWords has a free conversion tracking tool to help track how many clicks ultimately lead to conversions. Conversion tracking can also help you determine the profitability of a keyword or ad, and track conversion rates and costs-per-conversion.