PPC ROI Formulas: Find out if PPC is growing your business
Making PPC one of your company’s core growth channels is a major commitment and takes a great deal of trust. Whether you’re outsourcing its management to a PPC agency or hiring someone to run it, you have to trust that A) they have your company’s best interests at heart, B) they know what they’re doing, C) that they’re putting in the work, and D) that it’s contributing to the overall growth of your business.
Every company’s worst nightmare is that they spend a ton of money and it doesn’t move the needle, but it goes under the radar since you aren’t looking at the right data. I routinely run into this precise issue when I do the initial audit on our clients’ PPC accounts. Thousands and thousands of dollars of wasted budget are being spent every month on keywords with no conversions, ad copy with minimal engagement, and campaigns that shouldn’t be active in the first place.
This is why it’s so important to always stay on top of the ROI (return on investment) for your paid marketing channels.
This article will teach you everything you need to know about ROI and whether or not it’s growing your business.
Knowing your ROI is better than not knowing
ROI is the end-all, be-all KPI (key performance indicator) for whether or not what we’re doing is working. Some companies use ROAS, which I’m not a fan of and I’ll tell you why later on in the ROI vs ROAS section.
The reason you should know your ROI is very simple. Every marketing campaign should make more money than it costs to run. And if you aren’t tracking this KPI, you have no way of knowing if what you’re doing is working and how to better optimize it.
When you’re able to calculate your ROI, you can quickly prioritize which campaigns need your immediate attention and which ones can wait. This is incredibly important when you’re managing an account with a big budget since poor performers can waste thousands of dollars every single week if they’re left untouched.
But the real kicker is that when you know your ROI, you no longer have an ad budget. It becomes completely irrelevant. You have a revenue generation budget now, and here’s why.
Let’s say that you make $2 for every $1 you spend on PPC. You don’t have to worry about your spending since you recoup the initial dollar to run the ads and make another on top of it. Paid marketing is no longer a cost of doing business, it’s a source of on-demand revenue generation.
For example, if your company wants to generate an extra $1,000,000 in revenue over the next year, you can realistically achieve that goal by spending about $500,000 on Google Ads. This makes it much easier to plan your marketing budget for the next year because you have your revenue generation model down to a science.
PPC management by the numbers
As sophisticated as the Google Ads platform has become over the last decade, it’s still a simple input/output machine. You tell it what to do and it goes out there and does it.
Google has made campaigns easier to manage with their new machine learning driven automation, but you still have to do regular pulse checks to make sure they’re moving in the right direction.
In my experience, most businesses aren’t doing this and the data backs me up.
- < 10% of PPC accounts are optimized once per week (WordStream)
- 20% of Google Ads managers don’t touch their accounts each month (WordStream)
- 72% of businesses haven’t checked in on their ad campaigns in over a month
- ~58% of Google Ads accounts don’t have conversion tracking set up on their site
Google Ads accounts are being neglected or flat-out ignored by their managers.
These stats are downright frightening when monthly paid ad budgets can easily reach the 5-, 6-, and 7-figure ranges depending on the size of the business.
When I take on a new client, I typically find that 25 – 35% of their monthly budget is going to waste.
That ends up being about $8,750 – $10,500 a month, or $105,000 – $126,000 a year, since the average monthly budget of the accounts I manage is roughly $35,000. And that wasted spend has been going on for who knows how many months before I was able to get my hands on it.
KPIs you’ll need to calculate your ROI
Before we get into the meat and potatoes of finding out your ROI, you’re going to a few data points to accurately calculate it. Hopefully, you already know what these figures are or you can get your hands on them fairly quickly.
If you don’t have them close at hand, then this is an amazing opportunity for you to get your books in order and see if PPC is actually growing your business.
- PPC Cost: The total cost of running ads on your PPC account. Includes ad spend, employee salary, and/or agency costs.
- PPC Revenue: The total revenue generated from PPC traffic.
- # of PPC Orders: Total number of orders generated by PPC traffic.
- Profit Margin: How much profit you make, on average, each time you make a sale.
- Customer Lifetime Value (CLV): The total amount of revenue each customer contributes to your company over their lifetime.
- Customer Retention Rates: The percentage of new customers that continue to do business with you after their first purchase.
Different ways to track your PPC performance
There are three different formulas I use to calculate campaign performance and which one you use will depend on your business model and what type of check you’re making. Don’t worry, I’ll give a quick overview of each so you’ll know when and where to use them.
Now, full disclosure, these formulas are not bulletproof. However, they are significantly better than not tracking your performance at all.
Return on Ad Spend (ROAS)
While not an ROI formula, ROAS is a quick and dirty way for you to find out your campaigns’ performance. But one thing to keep in mind is that because it uses such broad data points, it’s the least representative of your true ROI.
Don’t get caught up on that though. The goal of this equation isn’t to give you a dead-on accurate reading of your profitability. This formula is meant to be used in conjunction with a benchmark as a quick barometer check for how your campaigns are performing.
This formula is great for those of you that just started tracking your performance for the first time or are managing accounts with large budgets and need a quick way to do a pulse check to help prioritize your daily/weekly workload.
I use this formula almost every single day as my go-to litmus test. It’s my canary in the gold mine. If this figure dips below my pre-set benchmark, I’ll know that it needs my immediate attention.
Return on Investment (ROI)
This ROI formula is when we start getting down to brass tacks. While it isn’t the most sophisticated ROI formula out there, it will give you accurate data on the impact PPC has on your business. This KPI calculates the ratio between your net revenue and your total PPC costs.
When you’re calculating ROI, don’t forget that there’s more to your PPC cost than ad spend. It needs to cover all of the costs of running your PPC campaigns. This includes SaaS service subscriptions, employee labor, agency retainers, ad spend, and any other ancillary expenses.
Long-Tail ROI Formula
This equation is one of the more sophisticated calculations you can use. If you don’t have these KPIs ready, they can take some time to put together. This formula completely ignores the short-term return of your PPC efforts and looks at answering the big question instead.
Is PPC growing my business?
You’ll notice that we’re not even looking at the PPC revenue figure anymore. The reason is that this will more accurately reflect the long-term revenue generation of your paid marketing initiatives.
Most businesses use PPC as a way to reach and earn new customers. You’re targeting people that need your products and/or services, but don’t know about your business yet. This means that most of your orders from paid traffic should be from new customers at the beginning of their life cycle. Hence why we’re bringing Customer Lifetime Value and Customer Retention Rate into the equation.
As long as you provided these new customers with a quality product/service, and your business model supports it, they should buy from you again thereby increasing the total amount of revenue that was originally generated by your PPC campaigns.
Quick note, this equation is built around finding out the long-tail revenue for ecommerce driven campaigns. If you’re running lead generation campaigns, you’ll want to substitute “(# of Leads x Lead Close Rate)” for “PPC Orders”.
Which Formula Should You Use?
There is a right time and place to use each of these ROI equations. And regardless of which one you go with, you’re still in better shape than ~58% of businesses that aren’t tracking their data.
ROAS is best used to establish a general performance level and for quick snapshots of a campaign’s performance. For instance, I’m usually managing anywhere between 7 – 12 Google Ads accounts during any given week. Depending on how smoothly a particular day goes, I may not be able to get to all of my daily checks.
However, I can use this KPI to see which accounts & campaigns need to be prioritized so I get to them before the day’s over. This way I can nip any wasted ad spend or performance issues that same day while the better performing campaigns can be pushed to the following day.
ROI should always be tracked but only looked at on a weekly or monthly basis. You don’t want to obsess over whether or not you generated a profit every single day. Doing that can lead you to make decisions about optimization that aren’t in the best long-term interest of your PPC campaign.
I’ll typically use this ROI formula during my monthly updates with our clients and when meeting with upper management so they know what their money is doing for them.
The Long-Tail ROI is what I use for quarterly and annual projections so I can find out if we’re still on track to hit our sales goals. It’s also the primary equation that I use when I’m managing PPC for SaaS companies, clients that have high retention rates, or companies that have long sales cycles. This gives a far more accurate view of the long-term revenue generation for their paid marketing campaigns.
Paid marketing can be a phenomenal source of highly qualified traffic and revenue generation for your company, but only if you keep a close eye on it. Letting your campaigns run unchecked can let them spiral out of control and hinder your growth trajectory instead of fueling it.
The only way for paid marketing to be both a sustainable and profitable traffic stream for your business is to track its ROI. Using any of the three formulas detailed above will give you the insights you need to make the right decisions when it comes to growing your business.
If you don’t have time to manage your Google Ads account or want to have an experienced professional take a look at it, we should talk!