When investing in SEO, AdWords advertising or social media marketing, you should measure the effectiveness of your promotional efforts. For this purpose you can use ROI indicator, which will be useful for both e-commerce industry leaders and small start-ups operating on the local market.
How to calculate ROI (return on investment)?
ROI (Return on Investment) is used to verify the profitability of business ventures, including marketing campaigns. Among other things, it helps to assess whether an investment in promotion has paid off, and to choose the most effective form of advertising that brings the greatest business benefit.
ROI is calculated using the formula:
ROI = (Current Value of Investment−Cost of Investment) / Cost of Investment x 100%
An example of ROI calculation
An online store has invested in a $300 AdWords campaign. During the marketing campaign, 10 products were sold at a price of $100. The unit production costs were $50. The return on investment ratio is as follows:
ROI = ((10*100) – (10*50 +300)) / (10*50 + 300) *100% = 25%
The marketing campaign paid off: for every dollar spent on production and advertising of the product, the store owner received $1.25.
Using ROI to measure search engine advertising effectiveness
Calculating ROI requires having concrete figures – costs and revenues. While the expenses incurred for online promotion are easy to determine (e.g. the budget for AdWords campaigns or the amount for website positioning), it can be more difficult to determine the revenue for certain types of websites. The problem of defining financial benefits will be faced by owners of information portals focused on traffic generation. How to measure page views that do not translate into the purchase of a product or provision of a service?
In such a situation, if we want to measure ROI, we should determine the value of conversion on the website. For example, if we have prepared an interesting e-book and our goal is to increase its popularity, let’s measure the value of downloading such a file. Revenue will be in this case as much as contractual, but such a method will allow us to turn non-financial benefits into concrete figures.
Another issue to consider is the sources of revenue that we will take to calculate ROI if we conduct business online and in land-based stores or transact business over the phone. Unfortunately, it is not possible to accurately examine whether search engine advertising or a high Google ranking of a service contributed to a purchase made in a physical outlet. When operating in multi-channel sales, we have two choices:
- Consider revenue generated solely by the online store,
- Include all sources of revenue.
To test the effectiveness of online advertising, we recommend analyzing only the online sales channel, because positioning or AdWords ads are more likely to contribute to online purchases than transactions made in a stationary store. The advantage of taking into account only e-store revenue when calculating ROI is the possibility of automatic recording of revenue using analytical tools such as Google Analytics. Thanks to such applications, not only will we know the conversion value, but also, for example, every month we will receive a generated report with a full set of data.
ROI vs. keywords
ROI will help us check the profitability of marketing activities, the profitability of particular forms of online advertising, and even the effectiveness of specific keywords. The easiest way to calculate ROI for successive phrases is to run AdWords campaigns. In Google’s advertising system we will receive information about conversions and costs generated by the keywords, which will make the calculations easier. In this way, we will know the keywords that bring the greatest benefits.
ROI analysis can be further simplified by integrating Google AdWords with Google Analytics. After connecting these two applications, it is possible to set up automatic reports containing ROI indicator for particular transactions and keywords. In addition, by entering the appropriate settings in your AdWords account, the system will optimize campaigns without your participation, moving the budget from phrases with a low ROI to those that enjoy higher efficiency.
Optimize your marketing campaigns with ROI
Monitoring ROI helps you to keep your finger on the pulse and check whether online promotion is profitable and translates into profits for your venture. Ongoing ROI analysis allows you to choose those forms of advertising that are not only effective but also efficient. In this way we can be sure that the budget allocated for marketing has been transformed into financial success of the company.