With any marketing campaign, you want to make sure you are getting an adequate return on the spend. Paid Search ROI tells you if the campaign is delivering on your business objectives.
Paid Search ROI
Return on Investment on your paid campaign may be calculated very simply as:
(Gross Margin – Paid Search Spend)/(Paid Search Spend)
Let’s say you spent $1,000 last month on paid search, which resulted in sales of $3000. The gross margin on your product or service is 40%, so the paid search ROI is:
($3,000*0.4-$1,000)/$1,000 = 20%
ROI is a business metric that takes your profit margins into account. I recommend adding this metric to your campaign performance dashboard.
Break-even Sales
When you are just starting off and your campaigns have not stabilized yet, it is very useful to calculate the break-even sales, i.e. what sales does the campaign need to drive in order to pay for itself.
Looking at the earlier example, the campaign would break even when the $ margin equaled the $ spent.
Break-even sales = Paid Search Spend / Gross margin %
Break-even sales = $1000/0.4 = $2,500
So the campaign needs to drive $2,500 in sales in order to pay for itself. If it can drive sales higher than $2,500 at the same spend level, then you achieve a positive ROI as in the first example.
Conversions
To calculate paid search ROI, you need to know the sales that were driven by paid search. To simplify things, let’s assume you only sell online. A conversion, in this case, is an e-commerce transaction. You need to be able to set up and track conversions to figure out if your campaign spend is worthwhile.
Google does a good job of explaining the nitty-gritty of conversion measurement so I will not get into that here. I will provide some guidelines to help you as you get started:
- Setting up Conversions – Google Ads or Analytics? – You have the option of using either of these tools. If you go the Google Ads route, you will need to add the Ads tag to your website. If you go the Analytics route, you will set up conversions as goals in Analytics and then import them into Ads. You get the same data in both cases (not exactly the same, but both approaches work for making business decisions). I prefer setting up goals in Analytics and importing them as I don’t need webmaster help for that.
- Adding Conversion Columns – Once you have the data, you want to make sure you add the appropriate columns to your reports in Google Ads.
- Using Conversion Data – Oh, the decisions you will make! Use conversion data to inform:
- Keyword strategy – Check to see which keywords are driving sales and which are not, and prune as needed, and
- Bidding strategy -Once you are tracking conversions, you can pick an automated bidding strategy, including the new “Maximize Conversion Value” bidding strategy. Use the time that is freed up to focus on more strategic work.
So that was a primer on ROI and conversions in paid search. Next week’s post is about picking a bidding strategy.