ROI: why it matters and how to track it -- part 3 of 3

In part two of this series, Fred Vallaeys, Product Evangelist for AdWords, discussed how to set up the conversion tracking feature available in every Standard Edition AdWords account -- and how to use conversion tracking information to track your ROI. Today, in the final installment of the series, Fred is back with tips on how to start using that ROI data to your advantage.

Once you have a week's worth or more of conversion tracking data, you should have enough information in your reports to start adjusting your bids to improve your ROI. Here are two strategies to improve bids using your new data.

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. CPC	Value / Cost (ROI)	Value / Click	Avg. Position	Clicks	Cost	Total Value	Net Profit
Current	$1.00	200%	$2.00	6.0	50	$50	$100	$50
Scenario A	$1.20	166%	$2.00	5.0	60	$72	$120	$48
Scenario B	$1.20	166%	$2.00	5.0	65	$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.

If your competitors aren’t looking at ROI data when setting bids, they won’t know which keywords are costing too much, nor which keywords could have delivered greater profits in a higher position. Now that you’ve got the data to see the complete picture and make smarter bidding decisions, you’ll have an edge over competitors who are bidding without being fully informed.

In addition, enabling conversion tracking is also the first step toward using two products which let you bid directly using Cost Per Action (CPA) bidding: the Conversion Optimizer beta and Pay-Per-Action (PPA) beta. These products may make it easier to reach your ROI targets, as well as help you to spend both your time and your advertising dollars more effectively.

Notes: for when you have ROI-negative keywords.

I don't say that you should definitely decrease bids for ROI-negative keywords, because it is also important to factor in the lifetime value of a customer. Also, a keyword may have been used in combination with other keywords before leading to a conversion.

The lifetime value of a customer is probably greater than the one-time conversion event. For example, if you’re selling flowers, it’s quite likely the customer may buy flowers annually for every birthday or anniversary. If you factor this in, the customer may be worth far more than the profit you make on their first purchase.

There is also the possibility that some of your keywords are used while customers are comparison shopping, and once they've made up their mind, they find your site again using another keyword. For example, if someone searches for “flowers”, they may just be researching their options. Once they know what type of flowers they want, they may do another more specific query such as “buy red roses”. If this happens, the conversion will only be assigned to the last keyword they used and you may want to keep the more general keyword to ensure potential buyers are aware of your site early in the purchase cycle.

This concludes Fred's ROI series, which we hope will help you improve your advertising results. Should you have any unanswered questions, or if there are particular areas you'd like to see covered in more detail, please let us know. We'd be pleased to invite Fred back for more posts in the near future.

Posted by Blake, Inside AdWords crew

ROI: why it matters and how to track it -- part 1 of 3

Over the past couple of years you've met a number of AdWords experts on our blog -- and, in that spirit, we'd like to introduce Fred Vallaeys, the Product Evangelist for AdWords. You may have met Fred in person, or heard him speak at recent industry events. If you're someone who attends these types of events keep your eye out for him: he loves to hear feedback from our advertisers firsthand.

Today, we begin a new series on a subject that is key to advertiser success: Return on Investment (ROI). In this series, Fred will cover why ROI matters, how to track it using tools available from AdWords or other sources, and how to optimize AdWords advertising for ROI.

Now that the stage is set, let's get started. Here's Fred:

I've heard it said at conferences that online advertising is the most cost-effective way for businesses to attract new customers -- but how exactly is such a claim measured? Well, one of the beauties of AdWords is that results are easily measured. Not only do advertisers get reports about clicks and impressions within their account, they can also track conversions of visitors to their site. One possible downside of having all that data, however, is that advertisers may become distracted by tracking lots of metrics at the expense of losing focus on the ones that matter the most.

On the other hand, many advertisers don't spend much time at all monitoring their campaigns. They might check only one metric, such as impressions, clicks, CTR, or their overall spend -- and so long as they don't see anything obviously amiss, they don't make any changes to their ads, maximum CPCs, etc.

Regardless of how much or how little an advertiser measures results, it's possible to miss out on potential profit if close attention isn't paid to the one metric that almost certainly matters the most: ROI. And while impressions, clicks, CTR and costs are all important components that contribute to the ROI, these metrics only show part of the picture.

The ROI metric can be defined in two ways: the revenue generated for every dollar spent on ads, or the amount of profit generated from every dollar spent on ads. I'm going to focus on profit here, since that's what most advertisers inquire about.

The formula for ROI is as follows (keeping in mind that the "revenue minus cost" in the top line equals profit):





For any campaign where the advertiser's goal is to get a conversion, whether it be a sign-up, a sale, or something else, the ROI should be greater than 100% -- which simply means that for every dollar spent on AdWords, they've made a profit. The greater the ROI number, the greater their profit.

Here's an example -- let's say an advertiser has two keywords ('flower delivery' and 'fresh flowers') and spends $50 on each. For the same $50, the advertiser receives 50 clicks for 'flower delivery' and 100 clicks for 'fresh flowers':

Keyword	Impressions	Clicks	Cost	Average CPC	Conversions	Profit	ROI
flower delivery	1,000	50	$50	$1.00	5	?	?
fresh flowers	1,000	100	$50	$0.50	10	?	?

Based on the data in the table, the keyword 'fresh flowers' seems like the better of the two because it has a lower average CPC and it leads to more conversions (sales). But without tracking the ROI on both keywords, an advertiser would have to guess whether it makes sense to change the bids for these keywords. If they were only looking at the average CPC or the conversions per keyword, they may be making assumptions that could end up costing them money.

Now, here's that table again -- but with figures added for ROI:

Keyword	Impressions	Clicks	Cost	Average CPC	Conversions	Profit	ROI
flower delivery	1,000	50	$50	$1.00	5	$100	200%
fresh flowers	1,000	100	$50	$0.50	10	$50	100%

Notice that the keyword 'flower delivery' has a much better ROI, even though it generated fewer conversions and fewer clicks for the same advertising cost. This could be the case for a variety of reasons -- for example, users who clicked on the 'flower delivery' ad may tend to buy products with a higher profit margin. The average profit per sale on the keyword 'flower delivery' is much higher ($20) than 'fresh flowers' ($5), which justifies the higher CPC for the keyword 'flower delivery', even in light of fact that it receives fewer conversions.

When an advertiser tracks and monitors their ROI, they are seeing the complete picture. This allows them to make smarter decisions about their online ads and, ultimately, make their business more profitable.

Now that you've seen why ROI matters and how it can help you to make more informed decisions, Fred will tell you how to track and monitor your ROI in part two of the series. Then, in part three, he'll take a close look at some tools and strategies for optimizing ROI. We hope you'll stay with us for the entire series -- and as always, please feel free to comment along the way.

Update: Republished to correct formatting of tables

Posted by Blake, Inside AdWords crew

AdWords Optimization Tips: More on Ad Text

A few weeks ago, we asked you which optimization topics you wanted to learn more about. Many of the questions we received were on creating effective ad text, which is the subject of today's post.

If you aren't familiar with our six-part series on optimization tips, you may want to check out our previous post on ad text tips. You can read up on the importance of describing your offering clearly, using proper grammar and punctuation, having clear call-to-actions, and other basic tips when writing ad text. Today, our optimization team is back to cover more tips like including prices and discounts in your ad text, ideas for testing different messages in your ad text, and tracking overall performance of ad text.

Should I mention prices or discounts in ad text?
It depends. While the most important component of ad text is a good description of your offering, you may also want to mention a price. If you consider your prices to very competitive, it may be to your advantage to advertise them. Conversely, if you sell a high quality product and charge a premium price, you may also mention price to set the right expectations and discourage bargain hunters. And if you are only promoting a discount on one of your products, do not give the impression that there is a general discount. In summary, your best strategy is to be straightforward with your potential customers, so the right ones are clicking through to an offer they were expecting to find.

What should I be testing in my ad text?
You can test different descriptions, call to action phrases, promotions, and special offers. Here are a few different points you may want to test:

• Different emphasis: product description, call-to-action, or promotional offer
• Including the brand name versus simply describing the offering
• Including the price in ad text versus including a discount or other special offer to differentiate your business
• Including an audience-specific message such as 'Perfect for Couples'
• Placement of certain messages in your ad text: headline, line 2, or line 3
  

You can also find good ideas for messages to include in your ad text by taking a look at what visitors are searching for on your site. If your site has a search bar, try looking at the search queries to see what they are interested in. Similarly, if you have web analytics tracking on your site, you can also look through the search queries that are bringing people to your site to see which features of your business resonate most with your potential customers. For example, if you offer vacation rentals, you may find that visitors are interested in certain amenities -- you can then include descriptions like 'pet friendly', 'hot tub', or 'concierge service' in your ad text.

When testing different ad texts, be sure to control for some portions of the ad text, while experimenting with the other portions so you'll be able to assess how effective the message you are testing really is. For example, if you are trying to figure out whether the call-to-action 'Buy today' or 'Learn more' is more effective, be sure to keep the description of your offering the same. You can also learn more tips on effective ad text by reading our Editorial Guidelines.

How can I better track the overall performance of my different ad texts?
One easy way to look at the overall performance of your ad texts is to run an Ad Performance report. You can run an Ad Performance report from the Report Center and then use the results from this report to identify low- and high-performing ad texts. For high performing ads, you can try testing a small variation of that ad with a different messaging or a different landing page.

Depending on your goals for your account, you may use different metrics to measure your success. (If you have conversion tracking, don't forget to use the 'Add/Remove Columns' feature in order to include conversion data.) Remember that your ad text with the highest CTR may not have the highest ROI. And don't just pay attention to the conversion rate, but the cost per conversion as well.

For even more sophisticated tracking capabilities, you may want to try A/B testing on text ads with Google Analytics. To read on this topic, check out this article from the Google Analytics Conversion University.

We hope you've found these tips on ad text to be helpful. We'll be back soon with other topics that you emailed us. And in the meantime, please continue to send us your questions on optimization.

Posted by Feng, Inside AdWords crew