Calculating ROI is one of the basic tenets of PPC, and yet many advertisers don’t consider it or even understand it. A lot of advertisers perform campaign optimizations based solely on conversion rate or cost per conversion, choosing the ads and keywords with the best metric and calling it a day.
As with so many things in PPC, there isn’t one best way to figure out if you’re making money on PPC. Across our client base, we’re using all three metrics in one way or another.
The important thing is to pick one method and stick with it. Don’t flip back and forth between metrics, or they’ll quickly become meaningless.
Return on Ad Spend
When most advertisers talk about ROI, they’re actually referring to ROAS, or return on ad spend. ROAS is simply PPC revenue minus PPC cost, divided by PPC cost. It’s usually shown as a percentage.
For example, if your sales from PPC are $1,000, and you paid $500 for PPC click costs, your ROAS would be 100 percent:
($1000 profit – $500 cost = $500) / $500 cost = 1.0 = 100%
Profit Per Impression and Profit Per Click
Even if you’ve accounted for all the costs to sell products or generate leads, you’re still missing a big part of the picture. PPC is about maximizing profit by generating the most visitors and sales at the best cost. That’s why I’m partial to using profit per impression and profit per click.
Introduced by Brad Geddes of Certified Knowledge, the profit per metrics take a holistic view of the search process. Conversions don’t happen in a vacuum – they require choosing the right keywords, getting ads in front of searchers, obtaining clicks at a good cost, and ultimately turning visitors into buyers.
Profit per impression/click is a little trickier to calculate than ROI and ROAS, but once you understand these metrics, they’re easy to generate in a spreadsheet.
Return on Investment
If you look up the definition of ROI, it looks a lot like the definition for ROAS: profit minus cost, divided by cost. The difference is how cost is calculated.
PPC click costs aren’t the only cost to a PPC campaign. In e-commerce, there are costs to make the products and fulfill the orders. There are credit card processing costs and the cost of returned goods. You also have customer service costs – the salaries of the people who answer phone and email inquiries.