The only way to know if your pay-per-click (PPC) campaigns are working is if you are making a profit. But how do you calculate that? By focusing on your return on investment (ROI).
ROI is a broad term that involves many formulas, depending on the factors you consider and the metrics you use. This post shares some of the most popular ones, with examples and benefits.
5 ROI Formulas to Measure PPC Marketing
PPC spending could reach thousands or even millions. Do not waste this precious resource. Know your ROI.
Here are some formulas to get your numbers:
- ROI
- Return on Ad Spend (ROAS)
- Payback Period
- Customer Lifetime Value (CLV)
- Profit Per Click or Impression
Let us take a more in-depth look at each of them.
1. ROI
To get the ROI, you divide 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 $1,000 on ads and earn a net profit of $2,500, your ROI would be:
ROI = ($2,500 / $1,000) x 100 = 250%
An ROI of 250% means you earn $2.50 for every dollar you spend on ads.
As you can see, the formula uses net profit, which is gross revenue minus expenses and the total cost of manufacturing and selling a product or service. These include:
- Overhead costs, such as office space and utilities
- Direct costs, such as inventory and shipping
- Marketing expenses, such as PPC campaigns, SEO, and social media marketing
- Labor
Because of these factors, ROI is one of the most effective ways to measure actual earnings and long-term profitability. According to Digital Authority Partners (DAP), it can even help you decide whether to hire in-house staff or outsource PPC campaigns.
2. Return on Ad Spend (ROAS)
Many marketers confuse ROAS with ROI because the formula is almost similar. But they are different.
To get the former, you divide the ad revenue by the spending and then multiply the dividend by 100. It looks like this:
ROAS = (ad revenue / ad spend) x 100
So if you spend $5,000 on ads and earn an ad revenue of $10,000, your ROAS would be:
ROAS = $10,000 / $5,000 x 100 = 200%
Based on the information above, ROI and ROAS vary in the following ways:
- ROAS is ad-centric. It helps you decide if your ad generates income and where to allocate your ad budget.
- ROI may be more difficult to measure because you should include all expenses attributed to the product or service, not just the ad cost.
- ROI is more long-term. Once customers buy from you, they may continue doing so for years. You cannot always attribute each purchase to a particular ad campaign.
3. Payback Period
The payback period is the time it takes for your PPC campaigns to generate enough revenue to cover your ad spend. To calculate it, you divide the total cost of a campaign by its daily earnings.
Here is the formula:
Payback period = total cost of campaign / daily earnings from campaign
For example, if you spend $500 on a campaign and it generates $50 in revenue every day, the payback period would be:
Payback period = $500/$50 = 10 days
This metric is one of the essential ROI formulas for PPC because it gives you a clear idea of how fast your campaigns are earning enough to cover their costs. Depending on the result, you can:
- Increase your ad spend until you reach the break-even point
- Scale back your campaigns to reduce expenses
- End the run of certain PPC ads if the recovery is slow
- Allocate a bigger budget to best-performing ads
But remember, a long payback period does not immediately mean your campaigns fail. External factors, such as inflation, can affect how fast your ads create revenue. Correlate the data with other key performance indicators (KPIs).
4. Customer Lifetime Value (CLV)
CLV is the projected revenue customers will generate during their relationship with your business. To calculate CLV, you multiply these numbers:
- Average purchase value (APV): total revenue divided by the total number of purchases
- Average purchase frequency (APF): the number of purchases divided by the number of unique customers
- Average customer lifespans (APC): the total number of customer lifespans divided by the total number of customers
Here is an example: Let us say your total revenue is $8,000, and the total number of purchases is 500. It means your APV is $8,000/500 = $16.
Now, if the number of unique customers is 100 and the number of purchases is 500, your APF is 500/100 = 5.
Lastly, if the total number of customer lifespans is 1,000 and the total number of customers is 100, your APC is 1,000/100 = 10.
Now that we have all the necessary information, we can calculate the customer’s lifetime value:
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 ROI formulas for PPC? Two reasons:
- Use it to set a maximum bid for each keyword.
- Optimize your campaigns to target high-value customers likely to generate a significant CLV.
5. Profit Per Click or Impression
One of the easiest ways to measure PPC ROI is to calculate profit per click or impression. You get the number by dividing your profit over a certain period by either impressions or clicks.
So the formula looks like this:
Profit per click or impression = (revenue – ad spend) / number of clicks or impressions.
For example, if you make a net profit of $10,000 and your ad campaigns generate 100,000 clicks, your PPC will be:
PPC = $10,000 / 100,000 = $0.10
Profit per click and profit per impression are not the standard PPC ROI formulas. However, they are still valuable because:
- They give you a general idea of whether your campaigns are profitable.
- The results can also tell you about changes in consumer sentiments.
- You can use them to compare different ad campaigns.
- The data is helpful in understanding which ones bring in more money.
- You can also easily break down your PPC by keyword, ad group, or campaign to see which topics or products are more profitable.
Summing Up
Knowing your PPC ROI offers huge benefits. The information helps you optimize campaigns for maximum profitability and scale them up to increase their investment return.
But the best ROI formulas to use depend on your business goals. So choose the ones that will help you measure your progress and make necessary adjustments along the way.
