When you invest your money in something, you want it to yield a return. This applies, among other things, to SEA (Search Engine Advertising). Unfortunately, revenue does not equal profit, as your costs must also be factored in. Some Google Ads campaigns yield better results than others. But how can you determine what is profitable and what isn’t within your SEA campaigns?
To properly assess this, we recommend using return on investment (ROI). This is a simple way to determine how effective your ads are. In this article, we’ll tell you more about ROI.
Tip: Google uses the term Return On Ad Spend (ROAS) within Google Ads campaigns. In fact, this is the same calculation as ROI as we describe it in this article.
What is ROI?
ROI refers to the ratio of revenue to expenditure for a specific SEA campaign. This figure is expressed as a percentage and indicates how profitable a campaign is. It can be either a positive or negative percentage. Do you track this monthly? Then you’ll be able to compare and improve your marketing activities based on the results.
Calculating ROI for SEA campaigns
To pay for your SEA campaigns, it’s important to know what your investment yields and where you should focus your budget. This is the key to a successful Google Ads campaign, especially if you outsource your SEA —in addition to Google Ads costs, you’ll also have to factor in web agency hours.
If you accurately track the ROI (and any other associated costs), you can make continuous improvements and help your online store grow. You can use the following formula to calculate the ROI of your campaigns:
ROI = conversion value of online revenue / costs * 100
This formula will give you a percentage that shows how profitable or loss-making your SEA campaigns are. Depending on your margin, average cart value, and profitability per product (group), you can, for example, aim for >400% ROI. A 400% ROI means that every euro you invest in Google Ads yields a return of 4 euros.
Please note that Google Ads displays ROI slightly differently than how we have described it here.
ROI or ROAS in Google Ads
As mentioned earlier, Google typically refers to ROAS rather than ROI. Although the formula is essentially the same as above, it is still slightly different:
ROAS = Google Ads conversion value / costs
As you can see, here you only extract the conversion value from Google Ads and, in addition, you do not multiply it by 100% => ROI 400% will then become ROAS 4. Google Ads does not display this metric by default, so you’ll need to add it yourself under “Modify columns.” You can do this by checking “Conversion value / cost” as shown here:
Google Ads is introducing more and more changes to its management system, such as the shift from ETA to RSA, as well as changes to bidding strategies. Google Ads is increasingly relying on automated bids that focus on ROAS, such as Performance Max.
Calculating ROI Benefits
Calculating ROI has several advantages:
- A major advantage is that you immediately know how profitable your SEA campaigns are and, ultimately, whether your online store is profitable or if you still need to take further steps.
- If you have a positive ROI that exceeds, say, 400%, you can increase your investment in the SEA campaign to generate more impressions, more clicks, and hopefully more revenue.
- This also applies if your ROI is lower than your pre-set target. It is best to optimize these Google Ads campaigns or lower your bids.
Disadvantages of Calculating ROI
Focusing on ROI helps improve your online store’s profitability, but there are also drawbacks:
- When calculating ROI, only revenue is taken into account, so you don’t get a picture of, for example, your company’s brand awareness. This is also harder to measure and cannot be easily done with an ROI calculation. So try to also look at the impact of your SEA campaigns on the bigger picture. For example, a Google Ads campaign might not generate revenue, but it could lead to more lead inquiries. If these result in orders, it would be a shame to discontinue the campaign.
- Additionally, returns are not taken into account. If you run a fashion e-commerce store, it’s not uncommon to have returns that lower your revenue. Suppose you have a good ROAS of 400% and 33% of orders are returned; in that case, your ROAS drops significantly, and the Google Ads campaign is no longer profitable.
- ROI calculates an average across everything and does not account for exceptions in your SEA campaigns. Suppose you’re running a Google Ads campaign for “women’s dresses” that includes various items. It’s possible that some items are more expensive/cheaper and/or have a higher/lower margin. Do all items have the same conversion rate? Furthermore: how do the aforementioned returns affect your items in this campaign?
It’s important to be aware that various factors play a role in your Google Ads campaigns and that determining your ROI—and focusing on ROI—is a step in the right direction.
Want to learn more about SEA?
Would you like to learn more about how we approach SEA search engine advertising or Google Shopping for your online store? Then contact us and discover what Digital Wizards can do for your SEA campaigns.
