Google AdWords has become a MUST not for only online marketers, also for many small business owners. Competition increases every day within advertisers. Especially with the direction Google is taking to become the monopoly in advertising industry, you need to become an advanced user of AdWords to be able to make money. I have been reading many articles, and blog posts about Google AdWords ROI. Most of these resources offer tips and tactics to increase your ROI for Google AdWords campaigns.
With Google AdWords, Yahoo Search Engine Marketing, and similar online PPC programs, you spend money to make more money. The money spend is called your cost/investment, and the money you make is your revenue. ROI (Return on Investment) has a basic formula, and it looks pretty easy on the paper:
So, if you spend $100 to sell a product for $200, your ROI is:
ROI= [($200-$100)/$100]*100 = 100%
Wow, 100% ROI, doesn’t it look GREAT ???
Well, it may NOT. You may be LOSING tons of cash if you follow this formula. Because this is your GROSS Return on Investment (Gross ROI). To be able to calculate your NET ROI accurately, you have to include other costs of doing business into the formula.
For many affiliate marketers, this may not be a BIG problem, but if you actually calculate all the cost (variable, fixed cost, admin cost, etc.) the big picture may become blurry.
Affiliate marketers use Google AdWords to bring traffic to their CPA/CPL campaigns. Ecommerce business owners use Google AdWords to bring prospective customers to their sites, and return these people into paying customers. There are different methods to use Google AdWords such as branding value increase, local business awareness, etc. But we will mainly focus on two examples, and go with REAL LIFE examples and numbers to calculate the NET ROI for their Google AdWords campaigns. Let’s start with Affiliate Marketer example.
Affiliate Marketer’s Google AdWords NET ROI Calculation
If you are a super/uber affiliate marketer, you have probably figured this out, but this may be a great example for beginner affiliate marketers. I hear failure stories of beginners quitting their day jobs after earning a few thousand dollars a month. So as a beginner you have to understand your business NET ROI. We’ll assume 3 different scenarios, think them as 3 different affiliate marketers.
Scenario 1: Affiliate marketer 1 works from his home, spends $5.000 / month on Google AdWords, and generates $10.000 / month revenue.
Scenario 2: Affiliate marketer 2 has exact same numbers as AM 1, but he decides to rent a small office. He is in Chicago, and he manages to find a nice office space for $500/month.
Scenario 3: Affiliate marketer 3 thinks big after making his first 5 figure a month revenue ($10.000). He lives in NYC. He quits his job right away, rents a small office in Manhattan for $1.000/month, hires a freelance ghost writer, and a freelance web designer for a total cost of $1.500/month.
Look at all three scenarios first. I have created this visual image to make it look straight.
They are all CHEAP and use Google Analytics to track their stats and AdWords ROI. At the end of the month, when they check their AdWords ROI stats, they all see a glowing 100% ROI. Each of them has spent exactly $5.000 on AdWords and made $10.000 affiliate revenue. So, the stats look fine, right? Of course NOOOOTTTT.
AM 1: Made 80.51% NET ROI
AM 2: Made 65.56% NET ROI
AM 3: Made 24.38% NET ROI
If these scenarios were REAL LIFE examples, and if the AM 3 quit his day job to start his affiliate business, he would go BROKE at the end of the first month. Why? Because he’s in NYC, and he’d never made it with $1.960/month.
I haven’t even included so many cost factors in the calculations (such as income tax, business insurance, daily coffee, electricity bill, etc. etc.). I just took a few minutes to create this excel sheet to show 3 different scenarios.
Feel free to DOWNLOAD this excel sheet and add your own cost details to find out your NET ROI. All the formula is in the excel, only enter YELLOW BACKGROUND fields, and you will find out your NET ROI. If you need more cost fields (I bet you will), right click on ROW 17 and “Insert Row”. Formulas will not break, you can play with this as long as you want.
Ecommerce Biz Owner’s Google AdWords NET ROI Calculation
Affiliate marketers may also have variable cost factors, but ecommerce business owners will have many more variable cost to consider when they are calculating NET ROI.
We will use a real life example for our ecommerce NET ROI calculations.
I have an (imaginary) client in this case. He is the SCENARIO 2. He finds a solid niche product which he imports from China. He buys it for $50/piece and sells it for $100/piece. His largest advertising budget goes to Google AdWords, spending around $5000/month. He doesn’t quite get the formula. His Google AdWords ROI shows as 100%. So, he thinks AdWords is helping his business a lot. He is making exactly $30.000 a month gross income, but he is burning cash every month (losing money). Last month only the business has lost $1.245 and he needs my help. Let’s look at his numbers for a moment:
He needs to catch the BREAK EVEN POINT (zero profit, zero loss).
I copy his excel sheet and paste it to SCENARIO 1. I write the formulas into excel to make every field dynamic. If his shipments per day increases, then his variable cost increases also (packaging, shipping cost etc. etc.)
After a quick eye browse, I tell him to close his eyes, and I say Abracadabra and ask him to open his eyes.
He can’t believe his eyes, now SCENARIO 1 shows a ROI of 0.08% (practically breakeven point). If you compare two scenarios, you will see only one difference; I have removed the Google AdWords Budget.
Yes, without spending $5.000 / month on Google, the business is now making less GROSS INCOME ($21.000 instead of $30.000), but at least it’s not losing money any more.
He is so excited, at the same time he feels so bad. He tells me how he’s spent hours to find keywords for Google AdWords Campaigns, and write ads, etc. It was all for nothing. But I don’t agree with him. Here’s my advice to him and to any business in a similar position:
Be very very careful when viewing your Google AdWords ROI stats. In this case we had a solid 100% Google AdWords ROI. Always calculate your NET ROI. Prepare your scenario first (SCENARIO 1), then put in the numbers for Google AdWords. It doesn’t matter how much you will spend, you have to set a goal for your Google AdWords Gross ROI. You have to work hard to achieve that goal of ROI with optimizing your campaigns, landing pages, etc. etc.
But after all, if you cannot achieve your goal of AdWords ROI, it may be better to rethink and maybe quit Google AdWords advertising.
Always remember this; Google AdWords is a great venue for online marketing, but it will NOT be profitable for every business due to obvious reasons (high competition, wrong optimization, etc. etc.)
Here’s the second excel sheet I have created for my (imaginary) ecommerce biz owner client. Feel free to DOWNLOAD this excel sheet and add your own cost details to find out your NET ROI. All the formula is in the excel, only enter YELLOW BACKGROUND fields (fixed costs), and you will find out your NET ROI. Of course remember to adjust the variable cost formulas accordingly. This excel was set to use 100% Google AdWords Gross ROI. Change the appropriate field to adjust it to your own business. If you need any help adjusting the excel sheets to your needs, please post a comment, I will be happy to help.
P.S. If you want to learn Google AdWords in depth. First step should be spending some serious time at Google AdWords Learning Center. As a second step, you can either buy an expensive eBook (there are many out there), or read the Best Google AdWords Guide I’ve ever seen. As your third step, work, test, work more, test more, then repeat step 3 again. Good Luck.
Have a PROFITABLE day.