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Fabio Cuffaro

Calculating ROAS and ROI in AdWords

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Having worked in many AdWords accounts, I come across a problem that most people don't even know they have. Novices to PPC tend to look at traffic as a key performance indicator when trying to increase revenue. They believe that by selecting many keywords and driving traffic to the site, it will automatically increase revenue. There may be the occasional sale, but generally speaking it is rare because they make the same common mistake when setting up a new account. They choose the Search with Display campaign and have their keywords set to broad match.

 

Selecting this type of campaign means that ads will be displayed in Google Display Network and not just search results. Based on keywords that you select, Google will place your ads on sites that contain content that is relevant to the keywords. It is OK to choose this type of campaign when the goal is to generate traffic, but when the goal is to generate revenue, a Search only type of campaign will be the most effective. 

 

ROI

 

I've chosen not to discuss how to properly set up an account since I will leave this for another post. Instead I would like to discuss the goal and work backwards. The reason for this is because the goal is not to have a "shiny", well structured account. The goal is to generate revenue and profit. If you keep that in mind, you will focus on what is most important and then make the necessary changes to the account to get the greatest return on your investment. 

 

What is ROI? ROI stands for Return On Investment and this measures profits. To calculate profit, you need to remove the cost from the revenue, then divide the cost with the remainder and multiply by 100 to get the percentage. For example: It costs you $10 to generate $100. To calculate the ROI you would use these simple equations. 

 

$100-$10 = $90

$90 / $10 = 9 

9 x 100% = 900% 

 

This means that your ROI is 900%.  The reality is that this only calculates the ROI for advertising and doesn't actually consider the cost of the product itself. 

 

Imagine for a moment that you're working with a 50% margin. How do you calculate the ROI on the actual profit ? Here are simple equations to come to the final result.

 

$100 x 50%(profit margin) = $50

$50 - $10 (cost of ads) = $40

$40 / $10 = 4

4 x 100% = 400%

 

At a 50% margin, your break even point is 100% ROI. With any new campaigns, you should strive first to break even, then work towards profitability. 

 

ROAS

 

ROAS  stands for Return On Ad Spend. This metric focuses on revenue generated. The idea with this metric is to see how much business is generated with from the ad campaign. Like ROI, the higher the rate, the greater the return. 

 

Using to same revenue and cost as above, you would use these equations to calculate ROAS:

 

$100 / $10 = 10

10 x 100% = 1000%

 

Your ROAS is 1000%

 

When launching a new campaign keep these two metrics in mind. It will help you select keywords, ads and ad groups that perform the best. If you are running a campaign take a look at the revenue generated in Analytics or AdWords and do the math to see where you stand. 

 

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