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ROI (Return on Investment)

ROI (Return on Investment)

Contents:

 

*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.

ROI (Return on Investment)

Quick Description = ROI is the relationship between Income and outgoings to establish profitability

Calculation: Revenue / Cost

Referred to as = Conv. Value / Cost (if not including wider costs)

ROI is a fantastic metric for demonstrating the value of account management or AdWords as a service. ROI is represented by a number or by a percentage:

  • Less than 1 (or less than 100%) = Loss is being made
  • Equal to 1 (or equal to 100%) = Break even (no profit or loss)
  • Greater than 1 (or greater than 100%) = Profit is being made

Therefore an ROI of more than 1 or 100% is typically desirable. More than simply determining profit or loss, ROI can be used to calculate how much profit or loss will be generated at any known revenue or cost. ROI is calculated like this:

Revenue / Cost = ROI

For example, if you generated $1,000 and spent $800 on Clicks, we would have an ROI of:

$1,000 / $800 = 1.25 (or 125%)

What this means (in this example) is that for every $1 you spend, you get $1.25 back in revenue. If we look at another example where revenue is

$700 and cost is $1,000, we get the following:

$700 / $1,000 = 0.7 (or 70%)

Here for every $1 spent, you lose $0.30 (or receive $0.70 in revenue). From these examples we come to the conclusion that if we know the ROI we can say how much money will be made or lost per unit of spend.

Including Wider Costs

ROI can factor in all costs, meaning for example agency fees could be included in cost. For example if an agency manages an account for a client, the client may use the following formula to calculate ROI:

Revenue / (Ad Spend + Agency Fees) = ROI

A business may look at a range of costs associated with the account, for example:

  • Ad spend
  • Design costs for ads
  • Account management fees
  • Design costs for custom SEM landing pages
  • Implementation costs associated with SEM recommendations

As such ROI can be a very accurate measure of profitability, for example if a client spent the following:

ROI (Return on Investment)

The total cost in this example is $3,900; therefore the revenue will need to exceed $3,900 in order to have positive ROI.

ROI Vs. ROAS

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.

All Conversions Value / Cost

Quick Description = This is ROI but includes the additional conversions included in ‘All Conversions’

Calculation: All Conversion Value / Cost

Referred to as = All Conv. Value / Cost

This is the same as the above metric but this includes the value of ‘all conversions’ (see ‘All Conversions’) where values have been set. This is only useful or relevant if you track additional conversion types (which have conversion values).

More Information

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)
  • ROI (Return on Investment)
  • 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

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