How to calculate the ROI of your PPC campaign

Whether you’re brand new to the world of PPC marketing or a veteran with decades of experience, being able to calculate the ROI of your PPC campaign is essential to the longevity and long-term success of your business – or your client’s business.

What does ROI mean?

Before we dig into the details of this article, we will quickly go over some basic definitions. ROI stands for “Return On Income” or “Return On Investment”, and is basically a way for us to understand how much money we’re getting back, in relation to how much money we’re spending. 

From a PPC or marketing perspective, you’ll usually be comparing the ad spend of your account to the amount of sales or revenue that you directly generated for the client or business. This typically won’t include the fulfilment costs of the service or product.

ROI – from a PPC perspective – is a metric to measure the profitability of a campaign and how much of a return has been made.

How is ROI calculated?

Calculating a campaigns ROI is fairly straightforward and only involves some very simple maths. The simple equation to calculate an ROI is “revenue” divided by “ad spend” – the higher the number you get, the more profitable your campaign will be. But not all campaigns are the same. 

Calculating ROI on an ecommerce campaign can be fairly straightforward (assuming you are tracking your sales accurately), calculating the ROI on a campaign that’s focused on other goals such as lead generation or brand awareness can be a little more challenging. So it’s important that you clarify what you’re measuring early on in your campaign and what it is financially worth to your business or client.

Let’s look at some different examples of how to calculate the ROI for several different PPC campaigns.

Example: Kim’s online pet store

Kim runs an online pet store, selling all sorts of accessories for cats, dogs and other common pets. She’s been running a Google shopping campaign for a month now and is keen to see how it is working for her. After checking her Google Ads account she knows that she has spent $2,000 on ad spend in the last 30 days, which generated her $20,000 in revenue. To calculate her marketing ROI (or ROAS in the case of ecommerce) she would divide her revenue by her ad spend ($20,000/$2,000) which would give her an ROI of 10. What this tells her is that for every $1 she has spent on ads, she has generated $10 in revenue. Well done, Kim!

Example: Mike’s plumbing

Mike is a plumber who services all across Melbourne with his team of plumbers, fixing pipes and unblocking drains. A month ago Mike started running some Google Ads as he wanted to get more new customers for his business. Looking back at his first 30 days of performance, he can see that he has $5,000 in ad spend.

Now, calculating revenue (to calculate our ROI) that is directly attributable to his lead generation campaign is a little more challenging, as Mike has received hundreds of calls in the last month and doesn’t have the time or ability to calculate the revenue generated from each of these leads. His next best approach is to make an educated assumption based on the data he already has. This can be done by taking the number of leads generated by the campaign (let’s say there’s 100 leads), multiply this by his closing rate (how many enquiries out of 10 will turn into a paying job) and then multiply by the average revenue of a paying job.

So let’s fill in the gaps here. 100 leads x 0.5 (1/2 enquiries turn into a paid job) x $500 (revenue of an average job) = $25,000 in estimated revenue. Using this we can now calculate his ROI – $25,000/$5,000 = 5. So for every $1 in marketing budget he spends, he generates $5 in revenue.

As you can see, with some types of campaigns generating an ROI is very easy, whereas others don’t give you all the info you need, so you need to fill in the gaps using the data that you have.

What is a good ROI?

A good ROI is extremely subjective and differs greatly from business to business and niche to niche. The marketing ROI is merely one aspect of a businesses success, as there are still fulfilment costs (of providing the service or product to the customer), other expenses, taxes, insurance, etc. that all need to be taken into consideration to help find what an acceptable ROI is for a specific business.

Let’s go back to Kim’s online pet store as an example. Kim’s fulfilment costs are roughly 50% of the sales price and this includes all her shipping costs. So for every sale that she makes, 50% of that customer revenue is used to buy the product and to ship it to her customer. Kim also knows that her marketing ROI is 10 (from the earlier example). So let’s say she generated $500 in revenue in one day. 50% of this ($250) will go to fulfilment and since her marketing ROI is 10, it will typically cost her $50 in ad spend to generate $500, so that too must be subtracted from her revenue. Revenue - fulfilment - ad Spend = Profit. ($500 - $250 - $50 = $200).

Every business has different expenses and different margins, greatly influencing what your marketing ROI needs to be. So it’s very important that you – as the business owner or marketing manager – know the numbers inside and out before launching any campaigns and ideally you should have an idea of what your minimum acceptable ROI (or ROAS) is, what ROI you're comfortable with and what your target ROI is.

Final thoughts

At the end of the day your ROI or ROAS is a key metric that lets you know how successful your campaign is and how much return it’s generating for the business. If this number doesn't look great (very subjective depending on the business) then it’s a warning that you need to make some changes. Getting a highly profitable ROI is generally achieved over time and involves a process to get to. Profitable PPC campaigns aren't just built, they’re refined, modified and improved over time.

Once you achieve an ROI that works for your business, you will be in a great position to scale and all sorts of amazing opportunities can open up.

If you are unsure how to create your own PPC campaigns, let us know and we can see what works best for your business.