How to Measure AdWord ROI and KPI’s for Your Small Business [Beginners Guide]
Do your eyes glaze over when you hear the words “ROI”, “KPI”, “tracking metrics” and “Google AdWords”?
I hear from a lot of small businesses and online marketers who get frustrated and overwhelmed by the prospect of tracking their online advertising results.
But measuring your returns - especially when you are paying to get them - should be your business’ top priority. Without tracking your profits on Ad spends, you don’t know if you’re making money. If you don’t know if you’re making money or not, well, you’re not going to be in business very long!
With Google AdWords you can track and measure just about any metric.
And it doesn’t have to be complicated!
In this article I’ll give you simple formulas to calculate your ROI and show you how to measure KPI’s for the top three advertising goals.
Measuring your Return on Investment (ROI)
When you’re a small business, I’m thinking you likely don’t have a big accounting department to track and analyze your ad budget spends.
But you still need to know if your Ad investments are generating profits.
Hey, if you’re spending money and you’re not getting back more money than you’re spending - you’re wasting your hard earned cash. You’ve got to stop the leak. You also should know if one Ad is generating more profits than another - so you can put more money into the profitable one.
Measuring your ROI doesn’t have to be overly complicated. You do need to do a bit of math, but, hey, that’s part of business. Let’s take a look at how to calculate your ROI.
A Simple Calculation for your AdWords ROI
As you likely know, your Return on Investment is basically a ratio of your net profit over the costs you spend to get the profit.
To put it in an equation, your ROI looks something like this:
Your ROI is your revenue less your cost of the thing you sold divided by the cost of the goods sold.
So, for example, let’s say you sell t-shirts. The cost to produce one t-shirt is $10, and you sell them for $20. You sell 100 of them from advertising them on Google. Your revenue (as you can see) is $2,000. Your cost to produce them was $1,000. And you spent, let’s say, $500 in advertising.
Your ROI is: 2,000 - (1,000 + 500)/ (1,000 + 500).
Measuring ROI for Sales
To measure your ROI for sales, you need to know:
- The revenue you made with your Ad Campaign
- The costs of your goods
- Your advertising costs (this is available through your Wishpond account, or your AdWords account, if you used Google AdWords directly)_
Now, you may not always know exactly where your sales are coming from. Whether you sell goods online or offline, here are a few tips to improve your tracking.
If you sell your goods online, it’s actually pretty simple to track. Here’s two methods for determining the online revenue you made from your online Ads:
Create a product landing page specifically and uniquely for your Google AdWords Campaigns. Then you can calculate how much product was sold via that page.
Or, if you’re using Google AdWords directly, set up Conversion Tracking and connect it to your AdWords account. (It’s not that hard to set up Conversion Tracking - you just copy an HTML code Google gives you, and you paste it onto the website you want to track results from.) Put the code on your product landing page to track hits. Or better, put the code on your “thank you” page, after the transaction has been completed.
If you don’t sell your products online, you can still track your sales made from your Google Advertising. Here’s my favorite way to track offline sales:
- Use promotions, like coupon codes, which are unique to your AdWords campaigns. That way, when someone redeems your offer, you can track which coupon code they used and you’ll know where your sale came from.
Calculating ROI for Leads, Website Traffic and More
Calculating the investment return for conversions and traffic is a little more tricky. You may not know the exact monetary value for a lead of someone who downloaded your ebook or requested more information. You probably don’t know the value of a click on your site, either.
You guessed it, there are formulas you can use to ballpark your investment returns.
The first calculation you need to know is: Cost-Per-Acquisition (CPA)
Your CPA is how much it costs your business to gain an action (such as a lead or a click, or even a sale) from a potential customer.
Calculate it by simply tallying your total costs for the Ad and dividing it by the total number of sales you obtained from your Ad campaign. In other words:
CPA = (Cost/Sales)
Let’s take the t-shirt example again. Let’s say you were also generating leads from potential customers by using an email-gated landing page that gave them access to a series of ‘how-to’ videos you made. You got 1,000 leads from this campaign. 100 of these leads purchased a t-shirt. Your net profit (revenue - costs) is $1,000 (as calculated above). Your total Advertising costs were $500.
Your CPA = 500/1000. Or $0.50.
If math is not your thing, try ClickZ’s online CPA calculator.
Or, if you’re using Google AdWords directly, set up your Conversion Tracking. You can measure both Conversions and Converted Clicks with the Tracking.
Here’s a few more formulas you can use to put your Ad dollar spends into perspective:
Value of a Lead = (Net Profit/ Total Number of Leads)
Advertising ROI = (Total Revenue - Total cost)/ Advertising costs x100
Average value per customer (AVC) = (Total Sales Revenue/ Number of Customers)
Note: If most of your customers are through recurring payments, you can use a much more complicated, but more accurate, formula:
AVC for recurring payments = (Total number of recurring payments/number of customers) x ((Recurring Payment Price #1 x Number of Customers Paying this Price) + (Recurring Payment Price #2 x Number of Customers Paying this Price) + … / Total Number of Customers)
Read more about AVC for recurring payment.
Metrics to Measure Your Top Advertising Goals
In addition to understanding the costs incurred and the profits you make, it’s important to measure other Key Performance Indicators (KPI’s) too. Your ultimate goal in business is to make profits, but there are many steps along the road to achieve this success.
Your business has its own unique goals. Three top goals that Google advertisers want are:
- Website traffic
- Brand awareness
- Sales and conversions
Let’s take a look at what metrics to use to measure your business and campaign objectives.
KPI’s to Measure Website Traffic
The simplest goal to track is website traffic. Even with the most basic of Google AdWords Campaigns, you can measure your clicks and click-through-rates for your Campaigns, Ad Groups and Ads.
Measure your website traffic so that you can improve your results, and get more out of your advertising spends.
The top KPI’s to measuring your website traffic are:
- Clicks - Your Clicks are the number of times someone clicks on your Ad Copy. Technically, a click is counted even if that person never actually reaches your Destination landing page. You can measure your Clicks for a Campaign, Ad Group or Ad. You can generate performance charts to analyze against your Impressions or Click Through Rates, or measure daily, weekly and quarterly performances.
- Click-Through-Rate (CTR) - Your CTR takes your Click rate further, and measure how many people have actually clicked through to your Destination URL. Your CTR gives you more accurate data on the website traffic derived from your Ads.
Note: According to Google itself, a good CTR on a search network ad is 1%.
Using these metrics, you can measure your Clicks per Keyword, your Clicks per Cost of Click, your Clicks vs. Impressions, and lots more.
KPI’s to Measure Brand Awareness
Not all advertising is to gain direct sales. Your business (or non-profit) objective might be to bring increased awareness of your company, products, services or cause.
For example, you may be introducing a new product or hosting an upcoming event. It’s not available yet, but you want to build excitement and generate anticipation. Use brand awareness advertising methods.
Tip: Display Network Ads are the best method to increase brand reach. Your Ad will be shown on sites related to your keywords (including Gmail, Google Finance and Blogger sites) - not just on search when people are more actively looking for you. You target your Display Network sites by keywords and topics via contextual targeting.
The top KPI’s to measuring your brand awareness campaigns are:
- Impressions - An Impression metric is kind of like the old school method you may have gotten from advertising in the Yellow Pages or a newspaper. Your Impression metric indicates how many people have viewed your Ad. You get much more accurate Impression data when you advertise online, and you can see specific information for your Ads, your Ad Groups and your Ad Campaigns.
CTR - Again, your CTR is a good indicator of your Ad’s success. The more people who are interested in your Ad Copy enough to click through to your site, the more successful you’ve been at raising awareness.
Reach and Frequency - Your Reach shows the number of people who could see your Ad. Your Frequency shows you how many times a person is likely to see your Ad. (It’s the old marketing adage: The more someone sees your brand or product, the more familiar they become, and the more likely they’ll buy from you.)
Tip: Use a CPM bidding strategyrather than standard CPC when your goal is raising awareness. CPM is Cost-per-thousand-impressions. It tends to lower your costs if your goal is to get more views than clicks.
KPI’s to Measure Sales and Conversions
Getting conversions - and sales - is generally the end goal of your advertising spends. A conversion means getting your prospect to take action on your ad’s landing page.
To measure your conversions directly through Google, you need to set up Google’s Conversion Tracking. Otherwise, you’ll have to either do it manually or use another third party conversion tracking software.
What you want your customer to act on could be anything:
- downloading an ebook
- signing up for a webinar
- a mobile phone call
- purchasing your product
The top KPI’s to measuring your sales and conversions are:
Cost per Conversions - Within Google AdWords, you can assign a dollar value for each conversion. This helps a lot when you are measuring your ROI. You can set up a whole spectrum of reports to show you where your Conversions are coming from, and where you should be spending more of your Ad dollars to optimize profits.
Conversion Rate - Your conversion rate can make it easy to track how many clicks you need (on average) to get a sale or other conversion.
Landing Page URL - You can measure which Destination URLs (landing pages) are generating the most conversions.
Did you learn a new term or a new tactic to measuring your Google Ad return on investment? Try out one or two of these methods to start to track and improve your business profits. Then implement a few more.
Hey, you might just get rich, and grow your business to the success you’ve always dreamed about.
Learn more about Google AdWords for your small business:
- Why Does My Small Business Need Google AdWords? [Ultimate Guide]
- How do I make a Google Ad Campaign for my small business? [With a secret tip to make it simple]
- How Do I Optimize Keywords [and ROI] for My Small Business AdWords Campaigns?
- How Do I Optimize Budgeting and Bidding in Google AdWords? [Basic Edition]
- 21 Ways: How to Create Landing Page/ Google AdWord Combos That Convert
Learn more about measuring ROI for online advertising:
What do you think? How do you improve your online advertising profits? Share your comments below.
Written by Krista Bunskoek @ Wishpond