Profit & Loss
*A conversion is when a user performs a desired action (being tracked) on your website. This could be buying a product, downloading a file, clicking a link or any other desired action. Typically, conversions are linked either directly or indirectly to revenue.
Quick Description = Profit & loss describe the relationship between revenue and cost
Calculation: Revenue – Cost
Referred to as = Not an AdWords Metric
This is a metric not included by default within AdWords, you can of course export data and calculate this from existing account data if revenue data is in the account.
Profit should be a positive number; anything less than 0 means a loss rather than a profit. Profit is for many organisations the ultimate metric to which all others are secondary. There are times when profit is not the focus of an account such as with charities, market share or market penetration strategies…
That said, in all cases the minimisation of losses will be a factor even if maximising profit is not. There are not many organisations that are happy with or actively seek to make a loss!
It is not always possible to calculate profit in an account, especially where figures are estimated or tracking is limited / restricted in some way. Often this is personified by organisations not tracking phone calls from the website, especially where the majority of business is acquired through a call centre or sales team.
ROI and ROAS are metric that shows whether something is in profit or in loss, typically represented by a number or a percentage. A positive ROI or ROAS will be a number greater than 1 (or 100%) and this means that you made a profit, you can even calculate profit if you know Cost and ROI or ROAS:
(Cost x ROI) – Cost = Profit or Loss
(Cost x ROAS) – Cost = Profit or Loss
If you had a positive ROI or ROAS of 1.3 (130%) and a Cost of $1,000 you would get the following answer:
($1,000 x 1.3) - $1,000 = $300 (profit)
If you had a negative ROI or ROAS of 0.85 (85%) and a Cost of $1,000 you would get the following answer:
($1,000 x 0.85) - $1,000 = -$150 (loss)
ROAS is the return on investment when only considering ad spend… ROI considers wider costs such as agency / account management fees. People outside of Search will often refer to ad spend as ROI and in some circumstances ROI and ROAS can be the same thing.
Typically we would recommend using the profit of a product as the conversion value rather than the total revenue, to avoid obfuscating profit margins. For example, a product being sold for $10 may only have a profit margin of 20%, meaning that the CPA target would have to be $2 to break even. Equally the relationship between ROI and CPA can be defined mathematically (see below).
For example, if a product is worth $10 and a client wants to make an ROI of at least 1.1 (or 110%) we can perform the following calculation:
Conversion Value / Target ROI = CPA Target
E.g. $10 / 1.1 = $9.09 CPA
Conversely we can reverse this like so:
Conversion Value / CPA Target x = ROI
E.g. $9.09 x $10 = 1.1 ROI
If you liked this guide on ROI (Return on Investment), you may also be interested in the following guides related to this subject:
- ROAS (Return on Ad Spend)
- Converted Clicks
- All Conversions
- Converted Click Rate
- Conversion Tracking
- Conversion Rate
- Cross Device Conversions
- Cost Per Converted Click
- Avg. CPC (Cost Per Click)
- Revenue Per Conversion
- Conversion Optimiser