Track Pay Per Click ROI with 2 Simple Metrics

Pay per click ROI requires a successful payback like any other promotional channel. But what is the right return on investment?

A report from The Nielsen Company indicates that online advertising has the highest ROI of any medium. It says that the short term ROI on all channels is 109 percent and for online it is 218 percent.

Although some may argue that the online number is questionable, there is no question that online marketing is more cost efficient. It doesn’t require a broadcast TV station, a newspaper circulation department, cable TV fiberoptics or a printing plant to produce a magazine.

In other words, it comes with an immediate cost efficiency. It gives the marketer room to experience, fail, try again and succeed at an online campaign without bankrupting the budget.

Let’s define our terms and explore “return on investment” and “return on advertising spend”.

Metric #1: Return on Investment

According to Nielsen, “Marketing return on investment (ROI) is the amount of sales achieved for every dollar spent on marketing / advertising.”

In other words, a 109 percent ROI is $109 back for every $100 spent. Depending on the formula, that $100 expense may include labor and other costs in addition to the ad campaign itself.

Why would anyone spend $100 just to profit by $9? For several important reasons.

1. The $9 return is a short-term pay per click ROI
2. Traditional media places high emphasis on branding
3. Traditional media is inefficient compared to digital, therefore the ROI is lower

Nielsen further says, “Generally when advertising in media, marketers can expect around 1.5 times higher long-term ROI compared to the short-term return.”

Miscalculating labor costs is a common mistake in analyzing ROI. In some cases, labor isn’t included at all.

But it is a critical number to include because the amount of time will vary from one campaign to another. That time  literally may make a campaign highly profitable or highly unprofitable.

Imagine developing a campaign with a budget of only $200 a month. Then try to sponsor 200 keywords across 10 different keyword groups with two or three ads per group.

Such a campaign would take a daunting amount of time to develop, track and adjust.

Metric #2: Return on Advertising Spend

A second metric is Return on Advertising Spend or ROAS. It is simply the ratio of the money spent on the PPC campaign divided by the resulting sales.

This simpler metric leaves no doubt about what to include in the ratio. It also is an easier way to start with tracking return. But it also provides less insight about the overall campaign performance.

Analytic software in some cases will track incoming site audience generated by a PPC campaign. It may even show the conversion — whether it is an on-site sale, click on a customer ad, click-through to an affiliate site, etc.

Based on the Nielsen study above, a good standard for ROAS is $2 in sales for every $1 spent on the campaign.

Social Media versus Search PPC

Advertising on Facebook tends to be more expensive than advertising on a search engine. But some will argue that Facebook is worth the extra cost because of its ability to target users based on extensive demographic and geographic information.

If the campaign focuses on gaining “likes” for a page, it results in a set of followers would show an affinity for the page and are much more likely to interact with it.

A Facebook “like” is a long-term investment. That like will probably stay a like for a long time and provide extra distribution of the brand to friends.

By comparison, a a pay per click visit from a search engine has lower odds of resulting in a return visit. Searchers tend to go harvesting for pieces of information rather than develop a long-term affinity for one website over many others.

As a result, the pay per click ROI of social media is quite a bit different than search engine PPC.

Whatever the metric used, it is clear that online pay per click campaigns have the potential to generate a high return on investment thanks to the medium’s exceptional efficiency.