What Is ROI?

Return on Investment (ROI) plays a major role in figuring out where a business should invest its money. It is used for comparing a business’s profitability or comparing the efficiency of its investments. The formula for figuring out an ROI is as follows:

ROI = (Net Profit / Cost of Investment) x 100

When it comes to marketing, this formula allows us to compare the effectiveness of advertisements against one another. The higher the ROI, the more effective it is. Therefore, we would want to invest further into that specific form of advertisement.

How Do I Calculate ROI?

Lets say Jerry’s Pizza Company wants to invest $1,250 into 1000 flyers to pass out in the local area. Now lets assume only 50% of those houses read it (500 leads), and 25% of those that read it actually order a $25 “dinner combo” for a total of 125 orders (conversions). The conversion rate of his flyers is 12.5%. Each dinner combo costs Jerry’s Pizza Company $10 to make (COGS, etc.). Taking this into consideration, Jerry’s Pizza Company has successfully generated $1,875 (125 orders X $15 per dinner combo) in Operating Profit. The Net Profit of the flyers would be $1,875 (Operating Profit) subtracted from $1,250 (Cost of Investment) for a total of $625.

Now that Jerry has all the parts of the ROI formula, he would divide his Net Profit ($625) into the Cost of Investment ($1,250) and then multiply it by 100 to make it a percentage. Jerry’s has now discovered that his pizza company has a 50% ROIThis means half of his marketing spend is made back as Net Profit.

Why Is This Important?

Now, a 50% ROI might sound amazing. But this number alone doesn’t provide us with much information. What if Jerry’s Pizza Company could have a higher ROI? This would mean that Jerry would be making more money off of the same investment of $1,250. To do this though, Jerry would have to invest into different advertising methods and compare the ROI of each of them to discover which performs the best. ROI is how we calculate and compare the effectiveness of our investments, and in this example it would be our advertising efforts.

Naturally, Jerry would want to improve his ROI on his $1,250 advertising budget. But what could he do next? Wouldn’t it be better if he invested his budget on people actually looking for his business or product? Fortunately for Jerry, Google offers a solution to this problem through their product Google AdWords.

What Is Google AdWords?

Jerry’s Pizza Company has many advertisement opportunities he could re-invest his $1,250 into. Today, lets look at the Google Search Engine. Have you ever noticed the businesses displayed at the top of the search engine?

 

There are two ways to get there. One is to rank “organically” through a process called Search Engine Optimization. The other, which we will be looking at in this article is known as Google AdWords. Providing an awesome opportunity to dominate the area for various search phrases, many businesses chose to invest into Google AdWords. Google AdWords  is a form of search engine marketing that charges a business for each user that clicks on their advertisement. Jerry’s Pizza Company may want to show up at the top of Google for the phrase “Best Family Owned Pizza Shop In Orlando”. He could create an ad that costs $0.63 per click.

How Do I Calculate the ROI of my AdWords Campaign?

Remembering our formula from earlier, lets see if we can figure out the ROI of Jerry’s new advertisement in Google AdWords.

With a $1,250 budget, we can get estimated 2,000 clicks to his website. That’s twice the amount of coverage as the flyers. Since the ad is served to a more relevant audience, lets say it converts twice the rate of the flyers for a whopping 25%. That a whopping 500 dinner combos and $7,500 in Operating Profit. With the same $1,250 (Cost of Investment), we now have a Net Profit of $6,250.  Once again we divide that Net Profit into the Cost of Investment and get an amazing ROI of 500%!

How Do I Compare The Effectiveness Of My Ads?

Taking a second to compare the success of our two different advertisement campaigns you can easily see which advertisement was may more successful in generating more business for Jerry’s Pizza Company. Below is a chart that not only compares the Flyers to the Google AdWords Campaigns, but also another scenario where total clicks we’re lower then expected.

1000 Flyers AdWords Set 1 AdWords Set 2
Cost of Investment $1,250 $1,250 $1,250
Leads  500  1000  2000
Conversions  125  250  500
Operating Profit  $1,875  $3,750  $7,500
Net Profit  $625  $2,500  $6,250
ROI 50%  200% 500%

From here it’s clear that Jerry would continue to invest his money into his AdWords campaigns over his flyers. But let’s take it another step further.

How Can I Improve The ROI of My AdWords Campaigns?

Search Phrases

There are many parts involved in making a successful AdWords campaign. The first way we can improve an Advertisement is by comparing the success of individual keywords or search phrases. Here is some mock data on a few different keywords Jerry’s Pizza Company is currently using on a $1,500 Ad Campaign in the Orlando area.

Keywords Orlando Pizza Shop Pizza Shop Near Me Family Owned Pizza Shop
Cost of Investment $500 $500 $500
Leads  350  825  1,124
Cost Per Click  ~$1.43 ~$0.61  ~$0.18
Conversions  50  132  165
Conversion Rate  ~14.3%  16% ~14.7%
Cost Per Conversion  $10.0  ~$3.79 ~$3.03
Operating Profit  $750  $1,980  $2,475
Net Profit  $250  $1,480  $1,925
ROI 50%  296% 385%

Looking at the metrics above, it’s easy to see that high conversion rates don’t necessarily mean a higher ROI. Certain keywords have higher cost per clicks, making the cost to acquire those leads more expensive. It would seem our best keyword is the “Family Owned Pizza Shop”, and we should continue to invest in it.

Target Locations

Along with keywords, target locations can have a huge impact on the success of a campaign as well. Lets look at a new $1,500 campaign for “Family Owned Pizza Shop” evenly divided into three local cities.

Locations Orlando Winter Springs Altamonte Springs
Cost of Investment $500 $500 $500
Leads  492  1327  786
Cost Per Click  ~$1.02 ~$0.38  ~$0.64
Conversions  73  122  54
Conversion Rate  ~14.84% ~9.19%  ~6.87%
Cost Per Conversion ~$6.85 ~$4.10 ~$9.26
Operating Profit $1095 $1,830 $810
Net Profit $595 $1,330 $310
ROI 119% 266% 62%

We can see here that just by changing our ads display location we can have entirely different numbers of conversions at different prices per conversion. Using this data we can see that the best ROI doesn’t necessarily have to come from the highest conversion rate. Even though Altamonte Springs ad converts more customers, it doesn’t give the best Return on Investment. The winner here is “Winter springs”.

Quality Score

The quality of an ad is a measured through a few key factors:

  • Click-Through Rate (CTR)
  • Keyword Relevance to Ad Group
  • Landing Page Experience
  • Relevance of Ad Text
  • Past AdWords Performance

Improve each of these factors rewards with higher ranking Advertisements as well as lower costs per click. Lets say that “Family Owned Pizza Shop in Winter Springs” returned 1327 leads at $500 with a quality score of 7 out of 10. Improving that quality score to a 10 out of 10 by adjusting the landing page experience we can increase the leads generated by 10%. Typically, a more relevant ad also converts better, giving us an additional 10% increase to our conversions.

Quality Score 7/10 10/10
Cost of Investment $500 $500
Leads 1327  1460
Cost Per Click ~$0.38 ~$0.34
Conversions 122  134
Conversion Rate ~9.19% ~9.18%
Cost Per Conversion ~$4.10 ~$3.73
Operating Profit $1,830 $2,010
Net Profit $1,330 $1,510
ROI 266% 302%

We can quickly see how the quality score of an ad can ever so slightly increase the ROI for “Family Owned Pizza Shop in Winter Springs”. By merely improving the website landing experience and creating a good quality Ad we can continue to improve the ROI of Jerry’s Pizza Company’s online marketing efforts.

What About the Flyers?

Using all of the information we learned in the last three ad tests we can clearly see that our best performing keyword is “Family Owned Pizza Shop”, and running it in the location of “Winter Springs”, would be the most profitable way to drive business for Jerry’s Pizza Company.

Lets take a look at Jerry’s flyers and compare it to the Improved AdWords Campaign with a $500 budget for each.

Type of Ad Flyers AdWords
Cost of Investment $500 $500
Leads  400 1460
Cost Per Lead  $1.25 ~$0.34
Conversions  50  134
Conversion Rate  12.5% ~9.18%
Cost Per Conversion $10 ~$3.73
Operating Profit $750 $2,010
Net Profit $250 $1,510
ROI 50% 302%

Now lets take a look at the a projected amount of numbers using the original $1,250 budget he used for his flyers and apply it to our Improved AdWords Campaign

Type Of Ad Flyers AdWords
Cost of Investment $1,250 $1,250
Leads  1000 3,560
Cost Per Lead  $1.25 ~$0.34
Conversions  125  335
Conversion Rate  12.5% ~9.18%
Cost Per Conversion $10 ~$3.73
Operating Profit $1875 $5,025
Net Profit $625 $3,775
ROI 50% 302%

Compared to our original budget for flyers, we literally increased out Net Profit by 604%!

Okay, What Did We Learn?

ROI is very important in comparing the success of our investments. By prioritizing budgets for a greater return on investment, we can take huge steps towards increasing the Net Profits of a business. With AdWords, we learned to see the true effectiveness of our ads is not our conversion rates, cost per conversion, cost per click or total clicks. The key to building a successful AdWords campaign is to improving the ROI of our campaigns.

Need Help Navigating All The Intricacies Of A Powerful AdWords Campaign?

Calculating My Net Profits

If your having a hard time calculating your Net Profits, this can make measuring your ROI difficult. Our experts are trained to look through all the details and help you figure out your cost of acquisition, cost of goods sold and more to help discover the true ROI of your marketing efforts.

Staying Up To Date

As Google’s Algorithms change, so do the search volumes and competition of keywords increase. These factors directly impact the cost of a keyword and the total amount of leads you can capture. Having a dedicated marketing expert can help you utilize all of your keywords and increase your ROI of all your Google AdWords advertisements.

Improving Your Quality Score

Sometimes improving the quality score relies on a website developers ability to create conversion optimized landing pages. Our website developers can help you improve the experience of your landing page and reduce bounce rates.

Whatever your need is, we would love to help. Contact us today with your questions!