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