Return On Investment (ROI) is one of the most important factors when evaluating the effect your advertising efforts are having on your business and whether or not you are allocating the correct budget to your Ad Spend in relation to the product or service you are advertising, and most importantly, whether or not your efforts are bringing in the return relative to what your products or services are worth.
ROI refers to how much profit you’ve made from your Ads versus how much you’ve spent on those Ads and, therefore, is directly related to your advertising goals as well as your products or services being advertised. It can also help you decide whether your budget for that campaign is working effectively —and how to effectively distribute your advertising budget (higher amounts for the campaigns that perform well, and lower amounts for those that don’t perform as well).
Before you can evaluate your ROI, you need to identify what a conversion is (any action that you deem to be valuable to your business) and how you are going to measure that conversion. Using the free conversion tracking tool in Google Ads will allow you to see which clicks lead to conversions, or, Google Analytics to track conversions and evaluate how your customers are using your website.
You would calculate your ROI as such:
(Revenue – Cost of goods sold) / Cost of goods sold
As a result of both the revenue and the cost of goods sold being included in your ROI calculation, your business is able to look panoramically at how your advertising goals are lining up with your actual performance, costs and sales and give you an honest evaluation of your efforts.
Here is an example to help illustrate how ROI would be calculated:
Example:
Suppose you run a shoe store, you would calculate your ROI with the following formula:
ROI = (Revenue – Cost of goods sold) / Cost of goods sold
Your Product Cost To Manufacture = $200
Your Selling Price = $480
Let’s say you sell 5 products.
Costs of goods sold (Without Google Ads Advertising Costs) (5 x $200) = $1000
Total Revenue (5 x $480) = $2400
Google Ads Advertising Costs = $200
Total Costs (Cost of goods sold $1000 + Google Ads advertising costs $200) = $1200
($2400 – $1200) / $1200
= $1200 / $1200
= 100%
Therefore, you receive a 100% return on investment, for every $1 you spend, you get $2 back.
If your business is using Google Ads to generate leads, the cost of goods sold is only your advertising costs, and your revenue is the amount gaining a new lead will earn you.
With the emphasis of “Return On Investment” being the “Investment” aspect, the value of each conversion should always be greater than the amount you spent to gain that conversion.