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How to Understand the ROI of Paid Search

Alec Sharratt

by Alec Sharratt on 5th November 2012

GrowthTraditional marketing and PR has historically had great difficulty proving ROI (Return On Investment) and in many cases ROI has simply been unknowable. One of the strongest aspects of online marketing is the ability to prove ROI and nowhere else is this done with as much ease and clarity as with PPC.

Aside from all the lovely data, one of the principle reasons I love PPC so much is the lucid transparency that AdWords offers with regards to calculating your ROI. Profit is the bottom line for all businesses, so understanding your Return On Investment is not just useful, it’s fundamental. Being able to prove ROI gives agencies and employees the ability to justify spend and demonstrate the value of PPC.

Prerequisites to Understanding ROI

Although the functionality is built into AdWords that facilitates the reporting of ROI, there are a number of important steps to take before you can actually do this.

Conversion Tracking Code

Conversion tracking is key to this whole process and depending on the size of your product / service range, you may need to set up a number of different groups of conversion tracking code. Tracking code is pasted onto the confirmation page that is displayed, for example, after a purchase is made. So, if you sell the eponymous “Big Red Widget” then place the tracking code on the confirmation page that appears after someone procures one of your big red widgets!

Linking With Analytics

Linking your AdWords account up correctly with your Google Analytics account allows you to analyse the PPC traffic from within Analytics. This means that you can see more detailed data on how your paid traffic behaves on the site, allowing you to determine obstacles to conversions. It is also possible to then compare organic traffic and other mediums with paid traffic. Another advantage of having these accounts linked is that you can create dashboards and custom reports to further interrogate the data or see top level information more easily.

This additional data is vital to split testing landing pages and optimising for conversions, providing you with the information you need to determine your actions.

For sites where you have needed to track conversions with “events” or “virtual page views” it is possible to import these as conversions within AdWords. Furthermore, if Ecommerce has been setup in Analytics, you can then track paid traffic as a segment within the Ecommerce data. This further improves the clarity you have of your Return On Investment.

Failure to link these accounts will mean that your data will become skewed and inaccurate as untagged paid traffic data is amalgamated into your organic traffic.

Tracking

Using call tracking and heat mapping and integrating this with your analytics data, where possible, also provides valuable insights into calculating ROI. If you receive a lot of telephone sales and some of them are from people calling after having seen your website, you may have a much higher ROI than you can see without call tracking.

Call tracking allows you to track phone calls as conversions and down to keyword level. This can be imported into AdWords or viewed separately, either way there may be hidden value in those keywords.

Heat mapping allows you to see how people are interacting with your site in great detail, thus allowing you to identify problems or improve visitor flow through to conversion.

Calculating the ROI

In its most basic form, calculating the ROI of an entire AdWords account is calculated thusly:

Total cost / Total No. Conversions = Cost Per Conversion

Value of Conversion – Cost Per Conversion = Profit per conversion

Profit per conversion x Total No. Conversions = Profit or Loss

Knowing these values then enables you to calculate some other insightful or interesting data. For example; by dividing ” Profit or Loss ” by “Clicks” you can calculate the average Profit or Loss per Click. If you identify your “Impressions Share” you can then project potential ROI in untapped areas of the account. To illustrate with an example:

Lost Impression Share due to budget = 25%

Conversions = 100

Conversion Value = £10

Clicks = 2,000

Impressions = 30,000

So in order to calculate what your potential ROI would be on increasing the budget enough to gain an additional 25% of impressions, you would do the following:

Conversions / Clicks = Conversion Rate (5%)

Clicks / Impressions = CTR (6.66%)

Impressions / 0.75 = Impressions (with increased budget) (40,000)

Impressions (increased budget) (40,000) x CTR (6.66%) = Clicks (increased budget) (2,664)

Clicks (increased budget) (2,664) x Conversion Rate (5%) = Conversions (increased budget) (133)

Conversions (increased budget) (133) x Conversion Value £10 = £1,330

It is possible to set up a value for each type of conversion or for each product that you sell, if this is done, it facilitates tracking how much money each keyword is either making or costing you. By comparing the” cost per conversion/s” with the” value of conversion/s” you can easily see profitability.

Behind ROI

This is top level Return On Investment though, digging into the data further will reveal much more information. One of the things that makes AdWords and PPC such a rich tapestry is the interdependent and relative nature of the data itself… At first glance a keyword receiving loads of clicks and good CTR but with a poor Conversion rate might be a waste of money, but keywords can assist other keywords, meaning that this keyword could assist in a large percentage of conversions. There is no clear ROI on this keyword but it would cost you in profits to delete it, understanding the relationships between data gives better insight into understanding your Return On Investment.

Looking for the common denominator will help you to spot opportunities and then exploit them. For example, look at the top converting landing pages for paid traffic. Compare them to the lowest converting landing pages and you may spot an obvious difference; something that you could change on the lower converting page.

Summary

ROI, although simple to calculate using AdWords, Analytics and spreadsheets, is a tricky beast! Improving all on-page aspects, removing obstacles to conversion, streamlining checkout processes and reducing costs within AdWords all help to improve ROI. Identifying opportunities through keyword research and analysing existing data can help shape and grow a PPC account. Almost everything you do within AdWords and on-page will affect the ROI, because all elements are connected.

Anything affecting Clicks and Impressions effects CTR, which is responsible for around 60% of Quality Score, which determines the Cost per Click along with Bid amount. Cost Per Click will determine the Cost per Conversion. Landing pages, keywords and ad copy also play a part in determining a relevance that also effects the Quality Score.

Understand your ROI in order to improve it!

Image Source

Business Graph Output Growth Of Silver Bars via BigStock

Alec Sharratt

Alec Sharratt

Alec Sharratt will be writing about his passion; the technical aspects of search. Well experienced within the IT industry, Alec has bags of knowledge on everything technical from simple spreadsheets that will save you hours right up to news and tips to make search that little bit easier.

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