What is PPC Return on Investment and How to Calculate It

Are you wondering how to determine if your PPC return on investment campaign is profitable in Malaysia? The key is understanding how to calculate your Return on Investment and Return on Ad Spend.

PPC, and yet many advertisers don’t consider it or even understand it. A lot of advertisers perform campaign optimizations based solely on conversion rate or cost per conversion, choosing the ads and keywords with the best metrics and calling it a day.

Read also: How Does the PPC Help Your Businesses in Malaysia

This might be sufficient if you’re collecting leads and not selling goods. You’ll probably end up with more leads in the end. But even if you’re just using PPC for lead generation, you should still calculate the return on your advertising investment.

First, what is ROI? ROI stands for Return On Investment. Your return is the income or your sales as a result of your advertising.

Your investment is the costs associated with getting that income. If you sell products online, the sales number is the revenue you received from those purchases.

If you provide consulting services, then sales are the fees you collect for consulting.

Costs included in the Investment piece can change depending on your needs and the structure of your organization, but they generally include the ad spend and other costs associated with your advertising.

PPC formulas are simply your return, or money you’ve made, divided by your investment, or advertising costs. The result is shown as a percentage.

Read also: The Benefit Of Using Pay Per Click (PPC) Advertising

Return on Ad Spend

When most advertisers talk about ROI, they’re actually referring to ROAS, or return on ad spend. ROAS is simply PPC revenue minus PPC cost, divided by PPC cost. It’s usually shown as a percentage.

For example, if your sales from PPC are $1,000, and you paid $500 for PPC click costs, your ROAS would be 100 percent:

($1000 profit – $500 cost = 5000) / $500 cost = 1.0 = 100%

The beauty of the ROAS calculation is in its simplicity. PPC managers can often perform the calculation in their heads, making it easy to perform optimization on the fly.

There are several ways to determine the cost of ads. you may want to track just the actual dollar amount spent on a particular ad platform, whereas other times you may want to include additional advertising costs such as:

• Salary Costs
• Vendor Costs
• Affiliate Costs

Depending on the type of ad campaign you’re running, it’s often useful to calculate the ROAS purely based on ad costs, and a separate ROAS that includes these additional advertising expenses to get a more complete picture of the campaign’s profitability.

Many bid management platforms calculate ROAS and use the metric in bid optimization algorithms. ROAS is a great place to start for calculating PPC ROI.

Return on Investment

If you look up the definition of PPC ROI average, it looks a lot like the definition for ROAS: profit minus cost, divided by cost. The difference is in how cost is calculated.

PPC click costs aren’t the only cost to a PPC campaign. In ecommerce, there are costs to make the products and fulfill the orders. There are credit card processing costs and the cost of returned goods. You also have customer service costs, the salaries of the people who answer phone and email inquiries.

Even in lead gen, where you’re not selling physical products, there are still costs. Consider fixed costs such as those that keep your website running: servers, equipment, and technicians. What about the salaries of the salespeople who follow up on all those leads? What about the cost for marketing automation?

The point is, to truly get an idea of ​​the cost of advertising, you’ll need to factor in all the costs, not just click fees. When you did in-house ecommerce PPC, you had a formula to assess marketing programs that took all costs into account, and applied it across the board.

You can calculate ROI in multiple ways. This article will review the method used most often to determine your ROI. Since most methods use real estate as a passive income vehicle, this article will look at an example around investing in real estate.

Identified the Net Return on Investment

Let’s say you bought a single-family home for $300,000. One year later, you were able to sell the same home for $60,000 more at $360,000 due to high demand and low supply. 

Since the seller pays a commission to each party’s agent, let’s say you paid 5% of the property sale value (2.5% for each agent), or $18,000. When selling the home, you will also have to use escrow to transfer the deed of the home and collect the funds for the sale, which will cost you another 3% of your sale value, or $10,800. 

You will also be paying 25% (the percentage will depend on your annual wages) on the gain in property value of $60,000 in capital gains tax, which will cost you another $15,000. There may be other costs incurred during the purchase and sale of the property, but to keep the example simple, say that these were all the costs you incurred.

Let’s look at the PPC ROI calculator with the information provided:

Net Return on Investment: ($360,000 – $300,000) – $18,000 – $10,800 – $15,000 = $16,200

Here you are taking the purchase price and subtracting it from the sale value of the home, after which you need to subtract out any other costs you incurred to obtain or sell the property. This would include any commissions to the agents, escrow fees and capital gains tax.

Determined the Cost of Investment

Let’s say you purchased the $300,000 home at the time through a conventional home loan at 20% down, or $60,000, so your cost of investment here would be $60,000:

Cost of Investment: $60,000.

Divide the Net Return on Investment by The Cost of Investment and Multiply by 100%

The final step is to divide your net return of investment of $16,200 from step 1 by your cost of investment of $60,000 from step 2 and multiply the decimal by 100% to get your ROI in the form of a percentage.

Net Return on Investment / Cost of Investment = $16,200 / $60,000 = 0.27

ROI = 0.27 x 100% = 27%.

Profit Per Impression and Profit Per Click

Even if you’ve accounted for all the costs to sell products or generate leads, you’re still missing a big part of the picture. PPC is about maximizing profit by generating the most visitors and sales at the best cost. That’s why I’m partial to using profit per impression and profit per click.

Introduced by Brad Geddes of Certified Knowledge, the profit per metrics take a holistic view of the search process. Conversions don’t happen in a vacuum. They require choosing the right keywords, getting ads in front of searchers, obtaining clicks at a good cost, and ultimately turning visitors into buyers.

Profit per impression/click is a little trickier to calculate than ROI and ROAS, but once you understand these metrics, they’re easy to generate in a spreadsheet.

You’ll need data for impressions, clicks, total cost, and total sales value. To calculate profit, simply subtract the total cost from the total sales value. (It’s up to you whether you factor in overhead costs, as described in the ROI section.)

To calculate profit per impression, divide profit by impressions. For profit per click, divide profit by clicks. From there, you can decide whether to roll out with the ad or keyword with the best profit-per.

Conclusion 

Google return on investment (ROI) Malaysia can be beneficial in many business or investment cases and helps an investor understand how well they can leverage their current assets to produce more assets. The Google Ads ROI calculator is generally an easy calculation to see how attractive an investment can be for an investor.

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