Calculating Return on Investment: Pay-Per-Click Search

Paid search marketing can help increase your visibility online, but it’s important that you make sure your investment, both money and time, is paying off. Generally speaking, return on investment (ROI) is the profit made from the money spent -- whether it’s new technology, new equipment or a marketing campaign. Understanding how to calculate ROI can help owners determine whether an investment was a good choice and decide whether you need to adjust the amount of money dedicated to a specific initiative. In the world of paid search marketing, calculating your ROI can help you determine which ads and keywords to continue using, which ones to scrap and guide you in the development of future marketing campaigns. Because you probably sell multiple products and services and advertise each of them individually, you’ll need the following information for each of your products and PPC campaigns in order to calculate the ROI on your paid search investment: • Ad cost: The amount you spend on paid search campaigns, such as your spend on keyword bidding. • Clicks: This refers to the number of visits to your site from paid listings. • Number of Sales: The number of complete orders from paid listings. • Revenue: The dollar amount generated from paid listings for that product. Simple ROI Calculators Now that you have your information in hand, use these simple formulas to begin calculating: • Ad profit: Revenue minus ad cost • CPA (Cost Per Acquisition/Sale): Ad cost divided by number of sales • ROI: The percentage of ad profits divided by ad cost, multiplied by 100

Setting Customer Acquisition Goals

The price you pay to acquire each customer (CPA) is a great place to begin setting goals and controlling expenses. You can adjust your spending to delete search campaigns that aren’t working, forecast ROI before beginning a campaign or negotiate deals for fixed placement search engine programs. The easiest way to determine what you should be spending is to start with your retail price. If you sell t-shirts for $15 and spend an additional $15 on advertising, you need to sell one shirt to break even. Fifteen dollars becomes your customer acquisition cost maximum. Because you probably want to do better than break even, you’ll want to lower your acquisition cost — perhaps to $12 per customer. When determining what you’re willing to pay per customer, also consider the lifetime value of customers (how many purchases they’ll make from you over the course of your business relationship) and your profit margin. Calculating ROI for product-based businesses is easier than for service-based companies. For owners selling services such as consulting, there is not always an immediate transaction associated with a tracked click-through. But, for instance, if you have succeeded in converting subscribers to your e-newsletter to clients for your services, you still want to set customer acquisition goals via the e-newsletter, set up pay-per click ads and track ROI.

Built-In ROI Calculators

The number of products and services that you sell, the number of places you advertise and the fluidity of the market can make determining ROI tricky. The good news is that most bid management programs on the market have click-through reports built into the software to help you get started. You can log on to check the number of times your site was listed in a search, the number of times a user clicked on your link and the charge for each keyword you are paying for. Click-through reports offer great insight but you’ll need to go into more depth to get the most from your investment. ROI tracking systems can monitor your sales data by search engine, product and campaign components. Programs like Yahoo! Search Marketing’s (formerly Overture) Marketing Console and Search Optimizer monitor how many searchers’ PPC-enabled clicks lead to actual sales — this will be very important information to have when you decide which paid search campaigns to continue and which to cancel. Usually, these programs take an aggregate of what you have paid for each click, factor in the traffic or site visitors, deduct any traffic not directly associated with the PPC investment and compare this number with the overall profit margin achieved through online activity. This makes it is easier to determine which keywords and search engines are giving you the most for your money. Monitoring your paid search efforts and tracking your results will help ensure that you spend your marketing dollars wisely.