How To Calculate ROI For Paid Ads And Maximize Online Profits

How To Calculate ROI For Paid Ads And Maximize Online Profits

What Is ROI And How To Calculate ROI When Playing With Online Paid Ads Like PPC

Return on investment (ROI) is a calculation that tells us whether a particular investment such as paying for online advertising like PPC, CPV or banner ads, is worth taking part in. The calculation tells us whether or not we’ll make money (a positive value), break-even (zero value), or lose money (a negative value).

How to calculate ROI or return on investment (ROI)?

ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

Gain from investment = proceeds as a result of the investment (for example, sale of a product or service)

Cost of investment = the out of pocket cost of having the investment (for example, the advertising campaign)

A positive ROI means profits and a negative ROI equates to a loss.

School of Internet Marketing

Simple Examples

1. The cost of your advertising campaign is $1,000, and it attracts 200 people and out of 200 people, 10% or 20 sales were made, with each sale netting $100.

ROI = (($100 x 20) – $1,000) / $1,000 = 100%

In this example, the total revenue is $100 x 20 sales = $2,000. When taken away the advertising costs of $1,000, we have $1,000 left for pure profit. Therefore, the ROI is 100%, means we profit 100% of the cost we spent.

2. Now, let’s say your advertising cost is $2,000 and attracts 400 visitors. 20% of the visitors purchased your product for $20. Are we able to make a profit?

ROI = ((400 x 20% x $20) – $2,000) / $2,000 = -20%

In this example, although we gained more visitors and the purchase rate was also higher, we were not able to make a profit. It is because the revenue on each product is too low. In this case, we were only able to make (400 x 20% x$20) = $1,600 which is less than the advertising cost of $2,000. Therefore, we have a ROI of -20% or a loss of $400.

The following section will provide more details on how we can monitor our advertising campaigns and do necessary adjustments so that we can turn a loss into a profit.

ROI Calculation For Online Paid Advertising

ROI gets a bit more complicated when it is applied to online advertising and email marketing:

• Cost of Advertising Campaign = Number of Clicks x CPC (Cost Per Click)
• Gain from Investment = Number of Purchases x Revenue Per Sale
• Number of Purchases = Number of Subscribers x Conversion Rate
• Number of Subscribers = Number of Clicks from Advertising x Opt-in Rate
• ROI = (Gain from Investment – Cost of Investment) / Revenue from Investment

Examples:

You are doing an advertising campaign that gets you 10,000 visitors and costs $0.50 per click to your landing page which on average generates 20% opt-ins. And you have an email sequence that promotes an affiliate product that you will receive $20 per sale, and your email sequence is able to convert at 10%.

Are you able to make money?

Cost of Advertising = 10,000 x $0.50 = $5,000
Number of Subscribers = 10,000 x 20% = 2,000
Number of Purchases = 2,000 x 10% = 200
Revenue from Sales = 200 x $20 = $4,000
ROI = ($4,000 – $5,000) / $5,000 = -20%
Therefore, it’s a loss of $1000 or 20% of investment.

So what can we do to so that we can break-even (ROI = 0) or be profitable (positive ROI)?

1. Increase the sale price or find a product with a profit higher margin. Given everything remains the same, what should the price point be:

Cost of Advertising = $5,000
Number of Subscribers = 2,000
Number of Purchases = 200
ROI = 0 (break-even point)

Substituting the above into the formula below:
ROI = (Gain from Investment – Cost of Advertising) / Cost of Advertising
0 = (Gain from Sales – $5,000 ) / $5,000
0 = Gain from Sales – $5,000
Gain from Sales = $5,000

Since we are required to make $5,000 to break-even, the revenue per sale is:
Revenue per Sale = $5,000 / 200 = $25
Therefore, we need to find a product that makes us at least $25 per sale to break-even or be profitable.

2. Increase the conversion rate by testing perhaps various aspects of the email sequence. What is the minimum conversion rate needed given everything else remains constant in the original example:

Cost of Advertising = $5,000
Number of Subscribers = 2,000
Revenue per Sale = $20
ROI = 0 (break-even point)

From example 1 above, we found out that to have ROI = 0, Total Revenue = Cost of Advertising, so:
Total Revenue = $5,000
Number of Sales = $5,000 / $20 = 250
Conversion Rate needed = 250 / 2000 = 12.5%

Therefore, we will need to ensure that our email sequence can convert at least 12.5% subscribers into buyers. We’ll start seeing profits when the conversion rate is higher than 12.5%

3. We can also increase the subscription rate by giving visitors different information or incentives:

Cost of Advertising = $5,000
Number of Visitors = 10,000
Conversion Rate = 10%
Revenue per Sale = $20
Total Revenue required = $5,000
Number of Sales required = $5,000 / $20 = 250

Since the conversion rate is 10%, we’ll need our subscription base to be:
Subscription Base = 250 / 10% = 2,500
Because we have 10,000 visitors, the subscription rate is:
Subscription Rate = 2,500 / 10,000 = 25%

Therefore, we need to have at least 25% opt-in rate to break-even. If the subscription rate is higher than 30%, you’re making money!

4. We can also decrease our advertising cost:

Number of Visitors = 10,000
Number of Subscribers = 2,000
Number of Sales = 200
Total Revenue = 200 x $20 = $4,000
Cost of Advertising = Total Revenue = $4,000
Average Cost per Click = $4,000 / 10,000 = $0.40

Therefore, we will need to limit our advertising cost to $0.40 per click instead of the original $0.50 per click. Having a cost per click lower than $0.40 will make us profits in this case.

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