Measure Return on Investment on your Online Ads

The great thing about Online Advertising is that you have all the data to measure the Return on Investment (ROI) of the campaign. This is a huge advantage over offline advertising in a newspaper or magazine where this level of measurement is just not possible. For an ecommerce business, the best way to measure the ROI is to calculate the Cost per Sale i.e. how much you are paying to get one sale from the online advertising campaign. The method I user to calculate this is outlined below.

 pd-on-google

In a recent post Seth Godin says that being able to measure the cost per sale negates the idea of having a set advertising budget. As long as you can acurately measure the cost per sale of the online campaign and compare it to a threshold based on your average order size the investment can in effect be unlimited.

I had previously posted about trying out a Facebook Ad campaign back in October and comparing it to our ongoing Google Adwords campaign. I gathered lots of data at the time but didn’t calculate the Cost per Sale. So in the Christmas shopping period I ran another Facebook Ad campaign and here is how I worked out the cost per sale for it and for Google Adwords.

1. Get the average Cost per Click

This can be obtained online from Google Adwords and Facebook Ads Manager. The cost per click for our campaigns was:

Google Campaign:  €0.30

Facebook Campaign: €0.42

2. Get the Percentage Conversion to Sale

Get this from Google Analytics.

Google Adwords Conversion Rate = 3.03%

Facebook Ads Conversion Rate: 1.35%

3. Calculate the Clicks to get a Sale (CTGAS)

Calculate this from the Conversion Rate. For example if the conversion rate was 5%, this would mean that the Clicks to get One Sale is 20. Or to put it another way – on average for every 20 clicks we will get one sale. So for the conversion rates above:

Google  Adwords CTGAS = 33

Facebook Ads CTGAS = 74

The formula is CTGAS = (100*Coversion Rate as a Percentage)/100

4. Finally Calculate the Cost per Sale

This is calculated by multiplying the Clicks to get a Sale by the Cost per Click

Google Adwords: 0.3 * 33 = €9.09

Facebook Ads: 0.42 * 74 = €23.68

Analysis – are they worth it?

For PuddleDucks our average order size is approximately €60. From this, we need to ask oursleves how much we are happy paying for a sale from the online ads – taking into account 1) markup and profit 2) covering operating costs 3) you may get repeat orders from the initial sale 4) you may get word of mouth orders from the initial sale. This is a soft number and I have decided that for us it’s €14. That means that if the cost per sale of our online campaign continues to come in under €14 we’ll continue to run it. In Seth’s blog post he says that Amazon had a similar threshold of $33 – but we’re a little smaller than Amazon!

On this criteria our Google Adwords campaign will continue but the Facebook campaign will not. During 2009 I will continue to measure our cost per sale for Google Adwords and keep trying to keep it as low as possible by changing keywords, adjusting cost per click, changing landing pages and the ad text. I’ll also try out Facebook Ads again on a limited basis and see if I can get the Cost per Sale down.

More thoughts on Facebook Ads: 

They will always have a higher cost per sale than Google Adwords due to the mode that the user is in at the time of click. For Google they are in a search mode – looking for a product or service. For Facebook Ads the user is going through their normal Facebook stuff when they happen to see the ad. So the Facebook Ad is akin to Banner Advertising really – although it is better targeted than normal banner advertsing due to the demographic selection you get when setting up the ad. So Facebook Ads will show a better ROI than Banner Ads but not as good as Google Adwords.

3 Comments »

  1. This is a very informative piece. The “mode that the user is in at the time of click” is a great point.

  2. Good points and succinctly put.

    Google Analytics allows you to track this exactly by putting in the value of achieving a Goal.

    You can then view a report on this in analytics and view it by segment too (adwords, natural listings, custom facebook one)

    Also you can set up the e commerce part and this will track your order values exactly and show you the exact return on investment of a given segment.

  3. @joe Thanks for the comment Joe. Great to know post are being read.

    @derek Thanks for the suggestion re Google Analytics. I haven’t added the ecommerce part to GA yet. Must do that now.

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