How to Calculate your ROI for Online Advertising campaigns?

3 Years ago, a Sales Manager at Google Adwords, and a friend too, told me if you know the power of Online Adverting, you will keep your campaigns "Always On". Because if for every 1000$ you pay on advertising you gain 1300$ revenue, then why limit your budget if profit can be unlimited?

So, to be more convincing we need to Calculate the net profit by subtracting your costs from your AdWords revenue for a given time period. Then divide your net profit by your AdWords costs to get your AdWords ROI for that time period. 

Here's an example:

($1300               -	$1000)        /	$1000        =	0.3
Your revenue (measured by conversions)	Your overall costs	Your AdWords costs	Your ratio of profit to advertising cost is 30% -- this is your AdWords ROI.

Sometimes your ROI may require a different formula. For example, if you're interested in calculating the ROI for a page view or lead, you'll have to estimate the values of each of these actions.

A Yellow Pages ad for your business may cost $1000 per year and result in 100 leads. Ten of those leads become customers, and each customer provides a net profit of $120, after taking your business costs into account. So the value of each lead is $12 ($1200 net profit/100 leads), and your ROI for the Yellow Pages ad is 120% ($1200 net profit/$1000 advertising cost) x 100.

Here's the formula used in this example: (Total revenue - Total cost)/Advertising costs x 100 = Advertising ROI %

A simple alternative to estimating values for your leads and page views is to use a cost-per-acquisition (CPA) measurement. Acquisitions are the same thing as conversions: they're actions your customers take that you think are valuable, such as completing a purchase or signing up to receive more information.

Using this method allows you to focus primarily on how your advertising costs compare to the number of acquisitions those costs deliver. Using the Yellow Pages example again, your ad may cost $1000, resulting in 10 sales. So your CPA for that ad is $100. Here's the formula for CPA: 

(Costs/Sales) = CPA

Your CPA shouldn't exceed the profit you made from each acquisition. For your Yellow Pages ad, the CPA is 20% less than the profit the acquisitions provide.

Formula to calculate Cost Per Acquisition

Cost Per Acquisition (CPA) is calculated as:

ad campaign cost/[number of impressions x CTR x CR]. 

Example: an advertiser pays a CPM of $10. For 20,000 impressions the advertiser has 5 percent click-through rate (CTR) to the landing (destination page). 30 percent of those 5 percent convert to paying customers(CR).

The calculation is: ($10.00 * 20,000Impressions / 1000)/(20,000*0.05*0.30) = $0.67. That is, the cost per acquisition is $0.67.

See Also:

• Cost Per Acuisition Formula for Local Business (Video)