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Calculating Your Net ROI for Google Adwords

Discussion in 'Google AdWords' started by onestop, Aug 23, 2007.

  1. #1
    I have been receiving so many questions about ROI (return on investment) calculations for Google Adwords.

    If you use a Google Analytics account, you can track your (GROSS) ROI even to the keyword level. This is a great feature. But many newbies make a huge mistake by considering these ROI stats as the only factor.

    I have written a detailed post about Google Adwords Net ROI Calculation.

    It mainly focuses on two groups; Affiliate Marketers, and Ecommerce Business Owners (people who actually ship products).

    I thought it might be helpful for DP members who are new to Google Adwords.

    Please visit my post: Net ROI Calculation for Google Adwords and let me know if you have any questions. I'll be happy to help.
     
    onestop, Aug 23, 2007 IP
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  2. CustardMite

    CustardMite Peon

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    #2
    Good blog! But...

    Whilst I agree with a lot of what you're saying, I think that your article may be a little misleading in some respects.

    It's certainly true that when calculating ROI, you should take into account fixed costs. But if you have an existing business, and are considering a new advertising medium, you shouldn't take into account any fixed costs (unless they are additional, like hiring a new member of staff).

    For example, suppose that in your example AM3 had been advertising via a number of different search engines to get these results, and was considering one part of his advertising - Adwords.

    He should judge the success of his Adwords campaign considering only the variable costs.

    Don't get me wrong - I'm not saying that what you've said is wrong, I'm just a little concerned that people running Adwords as part of a larger retail business will start throwing in fixed costs when determining whether to continue or not. Clearly they shouldn't, as the fixed costs would still be there if they stopped advertising on Adwords.


    All of that said, it's a good article, and these principles are something that anyone starting a new business should understand.
     
    CustardMite, Aug 23, 2007 IP
    onestop likes this.
  3. onestop

    onestop Well-Known Member

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    #3
    Hi CustardMite

    Great comment. I definitely thought about your point before writing this article. Here's my view on this:

    When I was at grad school, we were taught accounting cost formula as FIXED COST, and VARIABLE cost.

    But when I have started my own business, I have realized one thing. All of the preliminary business forecasts I had been doing were misaccurate.

    I was fresh out of college, and called my accounting professor right away :)

    I told him that we were taught many things wrong. I calculate my rent as fixed cost, but what if I have twice more employees, and twice more inventory, I have to move to a double size office. Then my rent will be exactly twice more. How can I calculate my rent as a fixed cost?

    In a similar perspective when you look at the second excel sheet I've prepared (ecommerce biz owner excel sheet), all the variable cost fields are affected by adwords budget. Adwords brings more sales, also more cost.

    If you think it as a whole business, you have to calculate your fixed cost at the end. The excel sheet numbers are very close to a real life example.

    This guy was basically losing money because of spending $5000 /month cash on adwords without an advanced knowledge of ROI calculation.

    But, I totally understand your point, and the biz owner should definitely consider both including the fixed costs and without including them when calculating ROI for adwords.

    When I started writing the article, I was going to focus on Adwords only, then it moved to a different direction, and I wanted to consider other parts of business costs.

    Thank you for taking your time, reading the article and sharing your thoughts.
     
    onestop, Aug 23, 2007 IP