The Real ROI of Pay Per Click (PPC)
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.
- 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 = 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
- ROI = Gross Revenue - Total Cost of Sale
- = -53.75
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.