Internet marketing can be very intangible. Although Google Adwords and MSN AdCenter gives you valuable data, it doesn’t show you the complete success of your PPC campaign. It’s hard to see the results, when nearly every part of the sales process is done online.
Your sponsored ads might drive 80% of the traffic to your e-commerce page, and you might not even have a clue that your PPC campaign is working well. It can be very difficult to understand how much money you are making (if any) from your PPC campaign if you do not take the right steps to learn its profitability.
In marketing, ROI is a very valuable, ever-evaluated tool. ROI helps you decide which marketing campaigns are the most effective, and gives you an idea how and when to optimize your campaigns, when to increase your budget, or when to pull the plug. How can you know what to do with your PPC campaign if you don’t know what it’s doing for your business? This blog will outline how to determine your PPC ROI to help you get a better grasp on the performance and value of your PPC campaign.
What You Need
To get started, you will need to get some numbers together:
- Monthly ad spend: The monthly amount of money you pay for your ads to be clicked
- Management fees: How much you pay your employee or marketing agency per month to run the ads
- Conversion rate: Conversion rate = monthly conversion/monthly clicks
- Cost-per-click: CPC = monthly ad spend/clicks
- Sale price per unit (or, average price per sale): Obviously, the more narrowed-down you can get, the more you would benefit from this tactic. If you have the capability and the “Google Analytics know-how” to correlate and track each click per sale, you would be able to estimate your true ROI.
Calculate Your ROI
Simply put, ROI = [Contribution]/[Cost]. However, with PPC, to get an accurate “contribution”, you must calculate several factors. The following equations will help you get to your ROI and return percentage.
[(monthly ad spend/cost-per-click) x conversion rate] x sale price = Gross per month
gross per month – monthly ad spend = ROI (a.k.a. net profit per month)
Net profit per month/(monthly ad spend + management fees) = Return percentage
Not all e-commerce PPC campaigns have the capability of tracking each conversion. Conversely, not all PPC campaigns are used for e-commerce. Many simply use PPC ads to generate leads for more business. In either case, these businesses cannot determine a true ROI, since the sale/service prices may vary with each lead. We can, however, use other options to calculate profitability. Here are some alternatives to reaching an idea of how your money is being invested.
[Total monthly made in sales/Total monthly number of sales]
Instead of using sale price as a factor, calculate the average cost-per-sale, and replace this with the “sale price” in the above equation to determine a good idea of your ROI.
[Total monthly made in sales/(customers per year/12)]
Instead of using sale price as a factor, calculate the average cost-per-customer, and replace this with the “sale price” in the above equation to determine a good idea of your ROI.
[(Monthly ad spend + monthly management fee)/monthly leads]
If your PPC campaign is solely used to generate leads, use the above formula to determine how well your investment is performing.
Not all PPC campaigns are created equally. It might be hard to determine exactly how much your company profits per unit or service, so a lot of research may be required to fully understand your true ROI. But the more you know, the better you can adjust your marketing budget or optimize your campaign. Try to dig deep to see how well your PPC campaign is working for you. It could be the sole driving force to your e-commerce success, or it could be a complete waste of your time and money.
What have you done to determine your ROI? Is it worth your time? Let us know if you find these equations helpful.