Conversion Tracking Basics

Introduction to Conversions and Conversion Tracking

Understanding and Calculating Return on Investment (ROI)

In online advertising, a conversion occurs when a click on your ad leads directly to user behavior you deem valuable, such as a purchase, signup, pageview, or lead.

Advertising is only effective if it generates measurable results for your business. Your Google AdWords account is an investment of time and money that you use to drive customers to your website. In this lesson, you’ll learn how to calculate your return on investment, or AdWords ROI.

ROI can also be called Return on Ad Spend, or ROAS. Your ROI can be calculated as revenue from sales, minus advertising costs, all divided by the cost of advertising.

 For example, if your advertising costs for the past week were US$500 and you've sold US$1,000 worth of inventory as a result, you have a 100% ROI for the week ((US$1000-US$500) divided by US$500). To express ROI as a percentage, you multiply the result of this formula by 100.

Determining your AdWords ROI can be a very straightforward process if your business is after web-based sales. You'll already have the advertising costs for a specific time period for your AdWords account in the statistics from your Campaigns tab. You can also create reports via the Report Center. The net profit for your business can then be calculated based on your company's revenue from sales made via your AdWords advertising, minus the cost of your advertising. Dividing your net profit by the advertising costs will give you your AdWords ROI for that period in time.

In other cases, 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. For example, a Yellow Pages ad for your business may cost US$1,000 per year and result in 100 leads. Ten of those leads become customers, and each customer provides an average revenue of US$120. The value of each lead is therefore US$12 (US$1200 revenue/100 leads), and your ROI for the Yellow Pages ad is 20% ((US$1200 revenue minus US$1000 spent)/US$1000 advertising cost) x 100.

A simple alternative to estimating values for your leads and page views is to use a cost-per-acquisition (CPA) measurement. This method will allow 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 ads may cost US$1,000, resulting in 10 sales: therefore, your CPA for those ads is US$100. Your CPA should not exceed your profit derived from each acquisition. In the case of the Yellow Pages ad, the CPA is 20% less than the revenue the acquisitions provide.