I have been working in online marketing for 5 years now and the amount of online business owners who do not understand Return On Investment (ROI) really surprises me.
ROI can be defined as;
“Return on investment (known as ROI) is the ratio of the cost of advertising relative to the profit generated from conversions such as sales or leads. Your ROI indicates the value to your business gained in return for the cost of your ad campaign.” Google Support Forum
There are several variations of formulas to calculate ROI, some take into consideration PPC agency management fees, client overheads, wages, API costs, postage, profit margins etc.
However the most basic formula (and the formula used in Google Analytics) to calculate ROI is;
ROI = ((Revenue – Cost) / Cost) * 100
Example;
Client 1 spends £150 in PPC click costs to gain £2,000 sales, the formula would look like this;
ROI = ((£2,000 – £150) / 150) * 100
ROI = 1,233%
This means that for every £1 spent in PPC, the client receives £12.33 in return, (please note this ROI formula doesn’t take into consideration profit only revenue).
ROI does not take into account the volume of sales, it is a measure of how much you spend compared to how much return you receive. Therefore a 500% ROI from a spend of £10 will not return more money than an ROI of 150% from a spend of £50;
500% ROI from a PPC spend of £10 = £60 revenue
150% ROI from a PPC spend of £50 = £125 revenue
All ecommerce businesses need to be calculating ROI at this basic level for all traffic sources. As already mentioned it is possible to setup ROI tracking in Google Analytics automatically by implementing ecommerce revenue tracking and linking your adwords and Google analytics accounts.
There are several arguments that Google Analytics actually calculates Return On advertising Spend (ROAS) instead of ROI due to not taking into consideration profit and the additional costs involved in running an online business. However the ROI mentioned above is a great starting point for beginners and more advanced formulas for working out ROI/ROAS will be covered in a separate blogpost.
