Measutring ROI and Adwords
Using Conversions to Measure ROI
ROI and Selling
ROI is the ratio of your net profit to your costs. For an advertiser it is the most important measurement. It is based on your specific advertising goals and shows the real effect your advertising efforts have on your business.
One way to define ROI is the Product sales ROI model. ROI = (Revenue - Cost of goods sold) / Cost of goods sold.
Let's say you have a product that costs $100 to produce, and sells for $200. You sell 6 of these products as a result of advertising them with Google AdWords. Your total sales are $1200, and your AdWords costs are $200. Your ROI is ($1200-($600+$200))/($600+$200), or 50%.
By calculating your ROI, you can determine how much money you have made by advertising with AdWords. Your ROI can help you decide how to spend your budget. For example, if you find that a certain campaign is generating a higher ROI than others, you can apply more of your budget to the successful campaign and less to the ones that aren't performing as well. You can also use the information to try improve the performance of the less successful campaigns.
Measuring ROI with Conversions
What if you do NOT sell a product directly to the customer.
In this case you can use a an alternative ROI measurement called Cost Per Acquisition or CPA. CPA can be used to estimate values for your leads and page views. Acquisitions can be thought of as conversions. Conversions are actions your customers take that you think are valuable. They represent actions like completing a purchase, signing up to receive more information or simply seeing an online page.
You can assign a value to this conversions and then calculate the ROI based on these numbers.
Using this method allows you to focus primarily on how your advertising costs compare to the number of acquisitions those costs deliver. Lets your ad costs $1000, resulting in 10 sales. So your CPA for that ad is $100. Here's the formula for CPA: (Costs/Sales) = CPA
Your CPA shouldn't exceed the profit you made from each acquisition. For our example ad, the CPA is 20% less than the profit the acquisitions provide.
So even if you run a business that does NOT sell direct, you can still measure your ROI and use these calculations to make better business decisions.
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