People spend a lot of time isolating Pay Per Click (PPC) traffic from Organic SEO traffic to analyze it separately but they never quite measure the real Return on Investment (ROI).  Do you actually know the full ROI on your PPC campaigns or is a tool feeding you a percentage?

Locating the Return on Ad Spend

We use Omniture Analytics for all of our website analysis.  It quickly separates PPC from Organic traffic and allocates a Return On Ad Spend (ROAS) for all paid traffic. Return on Ad Spend is the magic percentage point showing the percentage of money returned on the funds invested.  An ROAS of 200% means we spent a dollar and received 2 dollars in measurable revenue (generally gross product revenue).

Honestly, during any given month we will see our ROAS numbers anywhere from 0% (on a dead horse) to 1200% (not uncommon for a branded campaign).  We know how much money was spent and received but how much money are we making our client? And what do we do about it?  Do we automatically shut off a 0% campaign and scale up something above 200%?

What is the “Real ROI”?

In order to assess our profitability, we must first evaluate our costs.  What does it cost us to make a sale?  I know the fees associated with the PPC campaign, but what are the costs to the client?

We need the following questions answered before we can even begin to plan for a PPC campaign:

• What is your average Cost of Goods Sold (COGS)?
• What is your average return rate?
• What discounts are being applied at checkout?

All of these items are fairly simple for our clients to answer and it gives us an excellent place to start in our way to learning their overall cost of a sale.  We need to know that cost of a sale so that we can add it to the PPC fees to Google (and the management fees to First Scribe).  Only then can we give a solid Return on Ad Spend of Pay Per Click.

A Sample of ROI

The following is a sample of ROI assessment:

Reported numbers from Analytics:

• PPC spend: $50
• Gross product revenue: $150
• ROAS: 300%

These numbers look great.  It looks like we made 3 dollars on each dollar spent.  Let’s dig further.

Client information:

• Average Cost of Goods sold: 55%
• Average return rate of online sales: 20%
• Discount on this sale: 25%
• First Scribe fees: 15% on the $50

Note: The discount in this equation must be handled carefully.  As it turns out, what we thought was the net revenue was actually gross.  We need to use the discount of 25% to figure out Gross from Net so we can re-figure Cost of Goods Sold and average return rate.

Gross Revenue:

• Gross Revenue = Net Revenue / (1 – discount% )
• = 150 / (1 – .25)
• = $200

Total Cost of Sale:

• Total Cost of Sale = (PPC fee + Cost of Goods + Return rate + First Scribe Fee + discount)
• = 50 + 110 + 40 + 3.75 + 50
• = 253.75

Final  ROI:

• ROI = Gross Revenue – Total Cost of Sale
• = -53.75

Summary:

The software tells us we tripled our money but in final tally the example lost $53.75

A high rate of return and a heavy discount for summer clearance may sneak up and create a high cost of goods sold.  Be careful of judging success too quickly and make sure you are looking at the real bottom line.

Your mileage may vary but we generally expect profitability to start in the 400% territory.

Much like print and television, large numbers of websites are always focused on capturing and retaining as many eyes as possible for as long as possible in order to entice advertisers.  Google has been leaning on this strategy for years in order to increase the market share of its proprietary Adwords service. While there is no doubt that the quality of Google’s search results and name recognition have allowed them to take and hold the #1 spot among the Big 3,  over the course of the last ten years Google has been expanding its scope of products and services (Gmail and Google News being two examples) in order to retain their hold on not only search share, but also their users’ time as well. The logic being that the longer someone stays on a Google property, the more likely they are to click on an ad. But while Google is still the #1 search engine, its secondary role as a time sink and advertising portal has been challenged by the astronomical growth of Facebook.

Facebook isn’t a natural competitor to Google, at least not in the same way Bing and Yahoo are.  But Facebook is large enough and feature-rich enough to keep its users on-site, and away from one of Google’s properties or content network affiliates. Even in instances where Facebook has integrated some off-site features (Youtube videos being the best example), it’s implemented in a way that ensures users aren’t forced to navigate away from the site. Add in the fact that Facebook has adopted Bing search as the method for providing its 500 million users with off-site search results, and you have a battle that’s worth fighting. To their credit, Google has tried its hand in the caustic social networking market, but so far we’ve seen very little in the way of victories; Orkut is still largely irrelevant in the grand scheme of things, and Buzz hasn’t generated enough of its own namesake to appeal to a significant segment of users.

With all of this in mind it comes as no surprise that Google has changed their strategy slightly by investing over $100 million into social game company Zynga.  As the creator of Farmville, Texas HoldEM Poker, Mafia Wars, and Frontierville, Zynga’s online properties reach a little over 181 million active Facebook users per month. More importantly, up until now, Zynga operated its properties almost exclusively on Facebook.

Implicit in all of this is Google’s desire to integrate some of Facebook’s more addictive elements into a new online property. This isn’t a bad strategy.

According to a paper released by PopCap Games back in February:

95% of social gamers log on to play at least two to three times a week, and 64% log on one or more times per day.  Respondents to the survey listed widely varied lengths of time for each of their gaming sessions.  23% of those surveyed said they play for about 16 to 30 minutes at a time, 27% reported playing 31 to 60 minutes at a time, and 22% said that they spent one to two hours playing games in a single session.

Web browser games eat up a lot of time. And while a lot of companies and online marketing strategists have begun to explore all of the new revenue streams that underlie this deal, it isn’t the potential share of virtual micro-transactions or subscription-based fees that exemplify any real victory.

The real victory is that Google has managed to garner a deal that breaks Zynga’s exclusivity with Facebook, and in doing so provides an alternate avenue for players to access the games they enjoy on an Adwords-driven site.  Throw in the fact that Google already has most of the other basic social media pieces in place, and with the increasing amount of discontent over Facebook’s privacy issues, it wouldn’t be all that absurd if Google managed to steal away a significant piece of Facebook’s userbase.