Google AdWords advertisers often focus on their Return on Investment. They like to spend £x and make £5x profit or more.
But to focus on ROI is to miss a fundamental point about pay per click advertising: profitable advertising is profitable advertising. ROI is the wrong Key Performance Indicator. The easiest way to see this is to work through an example.
Calculating AdWords ROI
Suppose each sale makes you £10 in profit and that you need 10 visitors to your site on average to make one sale. Suppose too that you are buying traffic for 10p a visitor.
It is costing you £1 per sale (10 visitors) and you are getting a return on investment of 1000% because for each £1 you spend you are making £10 in profit. That’s a good ROI.
But suppose that you could double your traffic by doubling the amount you pay for each click and moving your ad up the ranks. Your cost per sale has shot up to £2 because clicks cost twice as much and you still need 10 of them on average to make a sale. So your profit per sale has reduced to £9.
But your AdWords ROI has been slashed to 450%. Disaster!
Except it’s not.
Let’s look at the profitability.
Where we were getting £10 in profit we are now getting 2 x £9 in profit. So we are making £18 instead of £10.
Our ROI is worse but the profit has jumped by 80%.