ROI: why it matters and how to track it -- part 2 of 3

Last week we introduced Fred Vallaeys, Product Evangelist for AdWords, and turned him loose on a topic that is likely to be of particular interest to just about every advertiser: Return on Investment (ROI). Today, Fred is back with part two of this three part series:

In part one of the series, I explained that it's important to measure ROI because this metric gives you the complete picture about the profitability of the keywords in your AdWords account. This week, I'll cover how to start collecting ROI data in your own AdWords account. Since ROI depends on how often you convert clicks into customers and how much profit you make on every transaction, you'll need to enable conversion tracking with conversion values in your account. Let's take a look at how to do this.

Conversion tracking is a free tool available in every AdWords Standard Edition account, and can be found by clicking on the 'Tools' link under the 'Account Management' tab. Once there, to start tracking ROI, click 'Start Tracking Conversions' on the Conversion Tracking page. In the two screens that follow, select the type of conversion you wish to track and the colors for the text block on your conversion page. The third page in the setup process is where you set the monetary value of the conversion by clicking the link 'Advanced option: conversion value' and entering your profit for the conversion.

You may remember from last week that we defined ROI as your profit divided by the cost of AdWords. AdWords will automatically track the amount spent on ads but you, as the business owner, must define the profit every time a conversion takes place. If every transaction has the same profit (e.g. when you sell a subscription for a fixed price), you can always set the same numeric value that represents your profit for the conversion. When you're selling items with different profits, you can set a different value for every transaction. Calculate the value to set by subtracting the cost of the item from the price for which you sold it. Note that your numeric value should not include a currency symbol and needs to use the decimal separator appropriate for your interface language. More details on entering your conversion values may be found here.

Your webmaster, or the person in charge of your website, can also use dynamically generated values to set the right profit value every time a conversion happens. We've documented the details of this process in the conversion tracking setup guide (.pdf).

Once conversion tracking is active, you'll see a few new columns in your account labeled 'Conv. Rate,' 'Cost/Conv.' (where Conv. is the abbreviation for Conversions) and 'Conversions'. Notice that ROI is not one of the new columns. To see your ROI based on your conversion tracking information you'll need to run a Keyword Performance report from the 'Reports' tab. Be sure to include the 'Value/cost' column (which is your ROI expressed as a percent) from the 'Add/Remove columns' menu. You'll probably want to save this report as a template and schedule it to run periodically. Note that you also have the opportunity to give your report/template a descriptive name, such as 'ROI Report by Keyword.'

For your reference, here is an example of such a report, with the Value/cost column highlighted:

(Click screenshot for a full-size image)

With your report in hand, you can see the ROI for every campaign, ad group and keyword. Any time the Value/cost is greater than 100%, you're making money, and the higher the value, the more profit you're making. This is powerful data that can help you optimize your account -- and next week I'll give some specific examples of how to use this data to give yourself an edge over your competitors.

Posted by Blake, Inside AdWords crew