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AdWords explained ROI why it matters and how to track it? – Part 3

In this final post of  “ROI: why it matters and how to track it” series, Fred is back with tips on how to start using that ROI data to your advantage.

When ROI is less than 100% — Using the type of report I described last week, sort the data on the “Value / Cost” column (which is your ROI expressed as a percentage) and look for keywords that have a negative ROI (i.e. less than 100%), but enough clicks that you’d reasonably expect some conversions to have happened. These are keywords for which your advertising costs exceed your profits, so your bids for these keywords may be set too high. (Please see the Notes section near the bottom of the post for further discussion on why I say ‘may’ here.)

In most cases, you should lower the bids for keywords with ROI less than 100% to the amount in the “Value / Click” column from the report. The “Value / Click” amount reflects how much profit you gain per click, so if you set your maximum CPC to this amount and the performance remains consistent, you will at least break even on these keywords.

When ROI is more than 100% — For keywords that have a positive ROI (i.e. greater than 100%), consider increasing your maximum bid — but not higher than the amount in the “Value / Click” column. By increasing your bid, your ROI will decrease but you may end up making a greater total profit because you’re getting more clicks when your ad moves to a higher average position.

Consider the hypothetical situation shown in the table below. To begin with, your max CPC of $1.00 puts you in position 6.0 on average and your ROI is 200%. Then, suppose there are two possible scenarios when you raise your max CPC by $0.20 to $1.20 to improve your average position to 5.0; in scenario A, the higher position gets you 10 extra clicks and in scenario B, you get 15 additional clicks.

Because you’re paying more for every click, your ROI decreases and you need more clicks to make the same profit as before. As you can see, in scenario A, your net profit has declined from $50 to $48 so you should keep the old bid. In scenario B, your net profit has increased from $50 to $52 so you should keep the increased bid and experiment with raising it even further.

Avg. CPCValue / Cost (ROI)Value / ClickAvg. PositionClicksCostTotal ValueNet Profit
Scenario A$1.20166%$2.005.060$72$120$48
Scenario B$1.20166%$2.005.065$78$130$52

About this table:
Cost = Avg. CPC multiplied by Total Clicks
Total Value = “Value / Click” multiplied by Total Clicks
Net Profit = Total Value minus Total Cost
Note that only the “Net Profit” column is something you have to calculate. All other columns are available in AdWords reports.

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Google, AdWords, ROI, Optimization, Tips and Tricks, Knowledgebase, Article, Series

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