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If you’re not measuring your return on investment (ROI) for pay-per-click (PPC) advertising campaigns, you might as well be standing on the street corner burning money.

This seems like a head-smacking, common sense statement, but you may be surprised how many businesses set up their keyword ad campaigns, sit back, and expect customers and their money to just waltz right in. You wouldn’t set next year’s operating budget for retail without setting projections, so why should you expect to do just that for your online advertising? The question then becomes how to do so?

Determining ROI for PPC campaigns can be as simple or as complicated as you would like to get, but it all boils down to four basic elements. For each product for which you have a PPC campaign, you need to start with:

  • Ad cost
  • Clicks
  • Number of sales (conversions)
  • Revenue

ROI for these campaigns is comprised of ad profit, cost per acquisition (CPA), and ROI, and the formulas are straightforward:

  • Ad profit = revenue – ad cost
  • CPA = ad cost / number of sales
  • ROI = (ad profit / ad cost) x 100

CPA is a great place to start setting goals, as it represents the price you pay to acquire each customer. The simple question is: How much are you willing to pay for each sale?

It’s important to remember that the highest ROI does not always mean highest profit. Would you rather make 10% profit on sales of $1,000 or 50% profit on sales of $100? Obviously you’d take the former, so just looking at the ROI isn’t always the best indicator of PPC success. You should also look at your profit per day. Personally, I’d take a 10% profit on sales of $500 per day over 50% profit on sales of $500 per month. The key is to plot your data so you can analyze trends and more accurately forecast for the future. It may seem like a lot of work, but it’s better than wasting money on campaigns that aren’t bringing in ROI.

There are a number of PPC ROI calculators, all of which are easy to use. If you’re running a fairly high number of ads and keywords, it really behooves you to chart and project your own ROI internally. But these simple online calculators are a good place to start.

Specific to Google AdWords: Quality Score

Google AdWords adds another ingredient to the PPC quiche: quality score. Quality score dictates ad position in Google results, as well as minimum keyword bid. In general, the higher the quality score, the better ad position and the lower the maximum keyword bid. Factors that figure into quality score include keyword click-through-rate (CTR), ad CTR, quality and relevance of landing page, and others.

More Resources

A more detailed explanation of Google AdWords Quality Score can be found at Google’s AdWords support site.

Search Engine Journal has a great article breaking all of these factors down further, and explains each component in detail. They also created a PPC ROI calculator that is easy-to-use.

In our next installment, we’ll look at how usability affects search engine optimization.

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