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AdWords Cost Based on Simple ROI Calculation

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Google AdWords is a worthwhile cost if it provides a good return on investment. Otherwise, why waste the money?

The most important measures of an ROI for AdWords are revenue and profit. The revenue measure is misleading. The profit measure matters much more.

The revenue may be in the form of advertising impressions if the ads are sold on a cost per thousand basis, cost per click if a network such as AdSense is used, conversions with an affiliate marketing program, e-commerce transaction, etc.

The profit of course is revenue minus expense. But it’s worth pointing out that expense includes the labor that goes into building and maintaining the AdWords campaign. That labor can be significant depending on the campaign budget and number of ads, bids and keywords.

For most sites, it’s a soft rather than hard cost, meaning that it doesn’t show up as separate dollars on an invoice. But it’s a cost nonetheless. It’s also an opportunity cost, meaning that labor dedicated to the campaign is labor not available for another priority.

Tracking AdWords ROI

Anyone using a combination of Google AdWords management tools, Analytics and revenue reports from ad-serving software will find that tracking ROI for a revenue point of view can be done in several simple ways.

For sites that use only AdSense, it starts with making sure that the accounts are linked together so Analytics displays AdSense results for every page, section, referrer and other site activity.

Go to Analytics and click Traffic Sources and Campaigns. Then click on the “AdSense Revenue” tab toward the right side of the page. Copy the total revenue for the campaign for the designated time period.

Now go to AdWords and look up the cost of that campaign for the same period. Divide the revenue by the cost minus 1.

For example, if the revenue is $1,000 and the cost is $750, the return on investment is 33 percent or 1,000 / 500 – 1.

Flipping those numbers around provides a “cost of sale.” In the example above, the cost of sale would be 75 percent or $750 / $1,000.

True AdWords ROI Based on Profit

Some webmasters say their goal is a 100 percent ROI or $1,000 in revenue for every $500 in AdWords cost.

Experience shows that such a goal is achieveable. But it takes ongoing optimization and continual learning and improvement to get there.

But that goal is deceiving. Again, it is not just the AdWords cost that matters but also the labor that goes into the campaign.

If the labor cost is $25 an hour, and 20 hours goes into building and managing the campaign, the labor cost is $500.

The campaign now has zero profit because the AdWords and labor costs together are $1,000 or the same amount as the revenue.

So the better way to measure the true cost of AdWords is by considering the advertising expense, the labor expense and any other expenses associated with the campaign.

An example of another expense might be hiring a contractor to create the copy or display ad image.

What is a good ROI based on profit?

  1. A profit that equals or exceeds the totaly business profit.
  2. A profit that equals or exceeds another initiative that would need the same labor and advertising expense.

If the business has an annual profit of 20 percent, a successful AdWords campaign would equal or exceed that number.

If a Facebook advertising campaign potentially can deliver a profit of 30 percent, the money is better spent there. Likewise, if it produces a profit of 5 percent, the money should not be spent there.

All Campaigns are not Equal

One campaign by itself will not reveal the true cost of Google AdWords. A single campaign has many variables that will impact the final results.

A business should try multiple campaigns to develop an average cost and ROI with a goal of improving the ROI over time.

The final AdWords cost — meaning the money spent just on the advertising itself — will be low for poorly performing campaigns that are stopped for poor performance.

They also are low when the business runs a small test or has a limited budget. The fact that a business can get started with only $5 is a good indication that the final cost of AdWords is entirely in the control of the business.

The final cost will be high for a successful campaign — as long as it has a profitable return on investment.

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