Understanding the various ways to calculate Pay Per Click (PPC) ROI (return on investment) is imperative for anyone online who wants to benefit from an increase in sales rather than just getting more leads. Before we go on, lead generation can be the goal and then optimisation can be done based on the conversion rate, but for more than lead generation, it is important to understand which method is the most applicable to determine the ROI on advertising.
Before we can fully understand the ways for calculating Pay Per Click ROI, we need to understand ROI. For most of you tech savvy people, it is obvious, but for new comers to the sponsored results game, in understandable terms, we can say that the ROI for PPC is calculated pretty much the same as for normal investments. The simplest formula reads profits minus costs, divided by cost. Simple enough, but the tricky part is in defining cost.
Return on advertising spending
The return on the investment made on ads refers to the revenue derived from PPC minus the cost involved, dividing the answer by the Pay Per Click cost and indicating the answer as a percentage. It does seem to get more intriguing though. Example:
The PPC sales are US$2 000 minus the cost clicks of US$1 000 will give you 100% Return on Advertising Spend (ROAS).
(US$2 000 – US$1 000)/US$1 000 = 1.0 (shown in percentage = 100%)
Return on investment (ROI)
Any business must in some way or another determine whether the investment is worth the return. As explained earlier, the ROI has the simple formula of profit-cost/cost, but you need to consider all the costs and not simply the click costs. Overheads such as online payment systems, call centres, postage or delivery and the actual product costs must be considered in addition to the equipment, website maintenance, sales people, and support staff.
In addition you also have costs such as electricity and insurance. Costs such as payment for optimisation, ad management, and hosting must be considered. For the complete ROI, you need to add all the costs together and not only the PPC click costs.
One of the main methods for calculating ROI is:
Revenue minus Investment, divided by the Investment multiplied by 100
(Revenue – Investment) / Investment * 100 = ROI
Note that several methods are used in practice. For PPC campaigns a simplified method of input divided by cost will suffice. To calculate the input for a PPC campaign, take the average profit per sale and multiply with the estimated number of conversions. Subtract the PPC spend from the answer.
Profit per impression
Pay Per Click is about getting optimal profit through a process that drives visitors and sales at the lowest possible cost. One has to understand that the conversion rate is dependent on factors such the right keyword selection, lowest possible cost for the ads, optimising ads for best visibility to the right audience, and then the conversions from searchers to buyers.
For calculation of the profit on impressions create a spreadsheet wherein you indicate the impressions, clicks on the ads, the total cost for the impressions, and the total sales. To get to the profit you will take total sales value minus total cost. If you want, you can also include the overheads in the cost. To determine the profit for each impression, you will simply take the total profit divided by the number of impressions.
Profit per click
To determine the profit per click, follow the exact rules for calculating profit per impression and just replace impression with click.
What to use
Decide which method you want to use based on preference and the purpose of calculation. Once you start with a method, you need to stay with it. You can of course, use all three, but then you must have three data sheets and stick with the process.
Determine whether you want to calculate the total cost per click or impression first since it will boil down to the ROI formula. If you struggle with the formulas, ask PPC experts to help you do the initial calculations and set-up the spreadsheet models for such. At the end of the day, you want consistency in formula usage to ensure an accurate reflection of the PPC ROI.