Analysing the ROI of PPC Campaigns: Beyond Clicks and Impressions
Return on Investment, or ROI, is an important concept in marketing, and business in general for that matter. As a principle, it’s fairly straightforward. ROI measures the profitability of business investments, whether you’re talking about spending on new equipment, human capital or, as we’re interested in here, marketing.
But for such a simple idea, ROI carries a lot of weight. As anyone in marketing knows, ROI is commonly used as the key measure in judging the success of campaigns. If marketing activity isn’t securing positive returns for the business, then why do it?
Ultimately, all marketing aims at having a tangible positive impact on a business, whether it’s growth in customer acquisitions, sales, revenue or anything else. That’s why ROI is so important. The problem is, it’s not always easy to link tangible financial gains to marketing spend.
This applies to pay-per-click (PPC) advertising. On the face of things, you’d expect PPC to be one of the easier digital marketing disciplines to calculate ROI for. With PPC, the advertiser pays when someone clicks a link in their advert. This means there’s a very clear, easily measurable link between ad spend and an obvious metric – the amount of traffic created by those clicks.
But clicks don’t equal sales, and sales are what ultimately determine revenue/returns on spend. Typical online buying journeys these days are often complex and non-linear. A potential customer might end up going through several more steps after clicking on an ad before they decide to purchase or come back another time to buy. How do you attribute that sale to that ad? How do you know when ad spend leads to revenue?
In the past, third-party tracking cookies provided a measurable link between digital ads and activity on a vendor’s website, helping advertisers attribute sales conversions to campaigns. However, since the demise of third-party cookies over privacy concerns, advertisers have found it harder than ever to follow customer journeys after ad clicks.
It’s clear, then, that the approach to measuring ROI for PPC advertising needs to evolve. In this article, we’ll explore how.
How PPC ROI is Calculated
ROI on PPC campaigns is calculated as a simple formula. You take the revenue earned (or, in marketing speak, the revenue attributed to marketing activity or advertising) and take away the cost. You then divide this figure by the cost and multiply it by 100 to give you a percentage. As a mathematical formula, it looks like this:
So say you spend £100 on advertising and earn £150 from it. Your ROI would be 50% – you make 50% more than you originally spent.
There is a similar metric used called Return on Advertising Spend (ROAS). This tells you your returns as a ratio to every pound spent. It’s calculated by dividing revenue directly by ad spend (so without subtracting cost from revenue first) and then multiplying by 100. So, in the example above, the ROAS would be 150%, or £1.50 earned for every £1 spent. It’s just another way of expressing the same idea.
As mentioned, PPC makes calculating the spend figure for both ROI and ROAS calculations easy. It’s just the total cost of the number of clicks (although you might also want to add other costs, like campaign development costs, or the fees paid to your PPC agency).
Cost per Click (CPC) and Click-Through Rate (CTR) are therefore core metrics in PPC advertising. CTR compares the number of clicks to the number of impressions your ads get. Impressions count the number of times your ad appears, for example on a search results page for paid search campaigns. CTR is therefore one way to measure conversion.
Ideally, you want a low CPC and a high CTR – this suggests you’re getting good value from the traffic you’re generating from your ads. But this still falls short of telling you the ROI. Low CPC and high CTR don’t equal good value if those clicks are not then driving sales.
So it comes back to the question of how you measure the revenue part of the ROI calculation in a way that is robust and reliable.
Going Deeper with PPC ROI
The answer lies in evaluating the entire customer journey, not just focusing on impressions, clicks and sales. The more data you have, the better you can join the dots to understand how A leads to B leads to C. It’s not always an exact science. But here are three ways you can build better data resources and strengthen your understanding of purchasing sequences in order to build your ROI calculations on firmer foundations.
Track key actions to view conversion in a holistic way.
We’ve established by now that there is a big gap between clicks and sales, and that in the post-tracking cookie era, it’s not easy to monitor how one leads to the other. But what you can do is fill in the gaps by tracking other actions – completing sign-up forms, following you on social media, downloading apps or brochures, asking questions about products, requesting a demo etc.
All of these represent different types of conversion. If you can track a consistent correlation across all of these, from that initial CTR and through to sales, you can be confident there’s a causal link. What is more, you can set up sequences of CTAs – click here to find out more, and sign up to get special offers on this product, would you like a free trial/sample? – and measure conversion rates across them to get an idea of how well one action leads to another across your customer journeys.
Measure engagement as well as conversions.
If a click doesn’t lead immediately to a sale, that’s not an indication of a fail. In fact, given the nature of modern customer journeys, clicks that do lead directly to purchase are the exception. It’s much more usual for customers to go away and mull over a purchase after viewing an ad, returning at a later date if they do decide to buy, and perhaps via a different channel.
That complicates attributing sales to ads, of course. But one thing you can do is measure engagement. Metrics like time spent on your website, average page views per session and bounce rate give you a good idea of how interested your audiences are when they click through from an ad, or whether people tend to leave quickly. Evidence of high engagement from ads gives you good grounds for attributing sales revenue to a campaign, even if the actual purchases come later.
Consider Customer Lifetime Value.
In truth, revenue earned from sales in the immediate aftermath of a PPC campaign is not the true measure of the campaign’s value to a business. That’s because most businesses aim to establish long-term relationships with customers who bring repeat business over extended periods of time.
In that case, a true evaluation of PPC ROI should take customer lifetime value (CLV) into account. This is the average amount you can expect the business to earn from every new customer brought in. This can provide strong justification for persisting with PPC even if sales attribution is tricky. If customer numbers are going up, a strong CLV means you are adding value to the business. In that sense, PPC can work just as well as a customer acquisition strategy, as well as a sales driver.
PPC remains a highly effective part of the digital marketing armoury. But given competition driving up costs for the most sought-after keywords, and the difficulties in determining ROI discussed in this article, it can be a tricky discipline to get right. That’s why more and more businesses are turning to paid search agencies to guarantee the best possible performance, and therefore the best possible value.
Get in touch with us today to learn more about our PPC management services.
James Bester
