Advertising on a pay per click platform such as Google AdWords is a marketing and numbers game. The ad that is most relevant, with the highest bid wins premium positioning. In order to win at the game, it is extremely important for advertisers to keep their costs in check. This brief article provides a quick overview of important calculations that advertisers should regularly perform to ensure their campaigns are profitable and performing optimally.
Raw Data Needed
In order to run the calculations provided in this article, it is advisable to run a report on the advertising platform for the past month, at least to find the following numbers:
- Monthly budget
- Average conversion rate (%)
Additionally, it is important to find out production costs as accurately as possible, to factor them into the real ROI calculations. The following numbers are required:
- Item / service selling price
- Cost of sale
- Average sale value = Selling price – all costs attributed to item and its sale
When checking performance of individual keywords, it is important to find the above values for the specific product or service line. When checking overall performance, the above values should be averages across corresponding product / service lines.
The formulae provided are specifically described keeping Google AdWords in mind, but can be applied for almost any other pay per click advertising platform, be it on Yahoo! Search Marketing or MSN adCenter, as well as most other online advertising formats.
Keyword Maximum Cost Per Click
Break even CPC = Value of each sale * Conversion rate / 100
Maximum profit attainable = (Value of each sale – Minimum CPC) * Conversion rate * Monthly budget / Minimum CPC
Return On Investment (ROI)
ROI = (Value of each sale * Number of sales / Advertising cost) – 1
The above calculations can all be applied at the individual keyword level, at an Ad Group / product line level, or at the campaign / account level. Lower level (keyword-level) analysis is recommended occasionally, to identify poor performing keywords, but should not be used for daily measurement, as such a micro view can blind advertisers to overall objectives.