The only way to know if your PPC campaigns are working or not is if you are making a profit. But how do you calculate that? By focusing on return on investment (ROI).
ROI is a broad term that includes many formulas, depending on the factors you take into account and the metrics you use. This post shares some of the most popular ones, with examples and benefits.
5 ROI Equations to Measure PPC Marketing
Pay-per-click (PPC) expenses can run into the thousands or even millions. Do not waste this precious resource. Know your return on investment.
Here are some formulas for getting your numbers:
- Return on advertising spend (ROAS)
- Payback period
- Customer Life Value (CLV)
- Earning per click or impression
Let’s take a more in-depth look at each of them.
1. Return on investment
To get the return on investment, you have to divide the net profit by the investment cost and multiply the result by 100. The equation looks like this:
ROI = (Net Profit / Investment) x 100
For example, if you spend $1000 on advertising and have a net profit of $2500, your ROI will be:
ROI = (2500 USD / 1000 USD) x 100 = 250%
250% ROI means you earn $2.50 for every dollar you spend on ads.
You see, the formula uses net profit, which is total revenue minus expenses and the total cost of manufacturing and selling a product or service. These include:
- Overhead costs, such as office and utilities
- Direct costs, such as inventory and shipping
- Marketing expenses, such as pay-per-click (PPC) campaigns, search engine optimization (SEO), and social media marketing
- the work
Because of these factors, ROI is one of the most effective ways to measure actual profits and long-term profitability. According to Digital Authority Partners (DAP), can help you decide if you want to hire internal staff or outsource your PPC campaigns.
2. Return on Advertising Spend (ROAS)
Many marketers confuse ROI with ROI because the formula is almost the same. But they are different.
To get the first, you have to divide advertising revenue by spending and then multiply the divisor by 100. It looks like this:
ROAS = (ad revenue / ad spend) x 100
So if you spend $5,000 on ads and generate $10,000 in ad revenue, your ROAS will be:
ROAS = $10,000 / $5,000 x 100 = 200%
Based on the above information, ROI and ROAS differ in the following ways:
- ROAS is focused on advertising. It helps you determine if your ad generates income and where to allocate your advertising budget.
- Measuring ROI can be more difficult because you have to Includes all expenses Attributable to the product or service, not just the cost of advertising.
- Long term return on investment. Once customers buy from you, they may continue to do so for years. You can’t always attribute every purchase to a specific ad campaign.
3. Payback period
Payback period is the time it takes for your PPC campaigns to generate enough revenue to cover your ad expenses. To calculate it, she divides the total cost of the campaign by her daily earnings.
Here is the formula:
Payback period = total campaign cost / daily campaign revenue
For example, if you spend $500 on a campaign and earn $50 each day, the payback period will be as follows:
Payback period = $500 / $50 = 10 days
This metric is one of the basic ROI equations for PPC because it gives you a clear idea of how quickly your campaigns are earning enough to cover their costs. Depending on the result, you can:
- Increase your ad spend to break even
- Cut back on your campaigns to reduce expenses
- Quit running some pay-per-click ads if recovery is slow
- Allocate more budget for better-performing ads
But remember that a long payback period does not immediately mean that your campaigns failed. External factors, like inflation, can affect how quickly your ads generate revenue. Link data to other key performance indicators (KPIs).
4. Customer Lifetime Value (CLV)
CLV is the expected revenue that customers will generate during their relationship with your business. To calculate the CLV, you multiply these numbers:
- Average Purchase Value (APV): Total revenue divided by total number of purchases
- Average Purchase Frequency (APF): The number of purchases divided by the number of unique customers
- Average Age of Customer (APC): The total number of customer ages divided by the total number of customers
Here’s an example: Let’s say your total revenue is $8000, and your total number of purchases is 500. This means that your APV is 8000/500 = $16.
Now, if the number of unique customers is 100 and the number of purchases is 500, then your APF is 500/100 = 5.
Finally, if the total number of clients is 1000 and the total number of clients is 100, your APC is 1000/100 = 10.
Now that we have all the necessary information, we can calculate the lifetime value of the customer:
CLV = $16 x 5 x 10 = $800
This number tells you how much revenue each customer will generate over time with your company.
What makes CLV one of the ideal ROIs for PPC? Two reasons:
- Use it to set the maximum bid for each keyword.
- Optimize your campaigns to target high-value customers that have the potential to generate significant CLV value.
5. Earn per click or impression
One of the easiest ways to measure your pay-per-click (PPC) ROI is to calculate the profit per click or impression. You get the number by dividing your earnings over a certain period by either impressions or clicks.
So the formula looks like this:
Earning per click or impression = (Revenue – Ad spend) / Number of clicks or impressions.
For example, if you generate $10,000 in net income, and your ad campaigns get 100,000 clicks, your CPC will be:
CPC = $10,000 / 100,000 = $0.10
Earnings Per Click and Earnings Per Impressions are not standard PPC ROI equations. However, it is still valuable for the following reasons:
- They give you a general idea of whether your campaigns are profitable.
- Results can tell you too Changes in consumer sentiment.
- You can use it to compare different advertising campaigns.
- The data is useful in understanding which ones bring in more money.
- You can also easily segment your PPC by keyword, ad group, or campaign to find out the most profitable topics or products.
A summary of the above
Knowing your PPC ROI offers huge advantages. The information helps you optimize campaigns for maximum profitability and scale to maximize ROI.
But the best ROI formulas to use depends on your business goals. So choose the ones that will help you measure your progress and make necessary adjustments along the way.