Google AdWords for Decision Makers: Calculating ROI

By Jasper Vallance | 08 Jul 2013

While it is possible to accurately calculate the return on investment for AdWords campaigns, there are still some significant gaps in visibility, writes Jasper Vallance.

The attraction of investing in AdWords for an e-commerce retailer is that you can directly attribute the online sales you get from paid clicks to estimate return on investment (ROI).

However, it has become more challenging to measure success as consumers now use multiple devices in the purchase process and with conventional tracking you cannot follow people across devices. To add to this if you’re a multi-channel retailer, how do you track sales driven into store by AdWords traffic?

In the previous article in this series, we considered some general concepts related to budgeting and partnerships. In this piece, we’ll look a little more closely on the various approaches you can take to measure ROI from AdWords in a range of key scenarios.

Estimate ROI as a Priority

Firstly if you’re an e-commerce retailer, it’s worth noting you can estimate the potential ROI of investing AdWords before you spend anything at all.

Use the Google Keyword Tool to estimate the cost-per-click (CPC) for a given product category and use your own internal data to estimate the conversion rate, average margin and the average value of a basket of goods in order to get a picture of what ROI you may achieve.

Given there are a number of variables at play (CPC, conversion rate, your margin and average profit per sales) the best approach is to run a trial campaign to see how these metrics work out in practice.

AdWords is an auction driven by the market, so the CPC should settle at a point where businesses get a positive ROI – but your actual experience will be reliant on the actual conversion rate you achieve.

At the end of the day, if your landing page, user experience or product offering is not as good or better than the competition it’s unlikely you will achieve a high enough conversion rate to justify an investment into AdWords.

Considering ROI for Mobile

If we go back even just two years before the mass usage of smartphones and tablets, it was straightforward to measure return on investment.

Back then you could set up conversion tracking within the AdWords interface to measure sales and/or set up e-commerce tracking in Google Analytics to track sales. As people were just using one device, they could be easily tracked through the path to purchase.

These days, as many as 40 percent of people that begin their product research on a smartphone will finalise that purchase on a larger screen. As a result, conventional tracking methods are no longer an accurate way of accounting for conversions and deriving an ROI.

Of course, it is possible to opt not to display ads in mobile search, but that effectively results in ‘cutting off your nose to spite your face’. As much as 30 percent of all Google searches occur on mobile devices, so not serving ads to this market will only lose you sales.

Fortunately, Google has provided the solution in its latest version of Google Analytics, called Universal Analytics, which is being released in Australia over the coming months. Universal Analytics tracks users with a ‘user ID’, allowing you to follow users across devices rather than the code currently used, which is specific to a particular device. Watch this space for more information!

It’s also worthwhile to have a look at Google’s new ‘Full Value of Mobile‘ tool, which allows you to upload AdWords data, incorporate your own business’s metrics before providing the support you need in order to create ROI estimates for multiple channels.

The In-store Challenge

Multichannel retailers that sell via one or more bricks and mortar outlets also face a challenge in attributing sales (or ‘connecting the dots’).

While most retail sales still take place in-store, the majority are being influenced by online research. Research from Google shows that AdWords does drive significant in-store sales and can achieve a favourable ROI in this channel. However, the reality is that there is no simple method for tracking people from online to in-store, just like there is not simple method for tracking in-store sales from TV or print adverts. You could try online coupons to track redemptions in-store, but this is far from foolproof and still won’t result in a high-fidelity ROI.

However, Forrester Research has developed a set of multipliers that can be used to estimate in-store sales from online sales. The multiplier varies based on product category, as certain products have a higher tendency to be purchased in one channel or the other.

Forrester Research online versus in-store multipliers tablet

Forrester Research has created this table of multipliers to indicate how many online product searches result in in-store sales for each product category.

These multipliers are calculated on US sales data as well as a number of qualitative factors, so I would still only suggest using them as a rule of thumb. That being said, a conservative multiplier serves as a better basis for calculation than no data at all and retailers stand to benefit from ensuring the right level of AdWords investment is reached more quickly by committing to full-scale trials that harness these figures, before later tweaking as required.

The new Universal Analytics will also provide a solution where the User ID can also be applied to point of sale platforms and loyalty programs, further increasing your ability to calculate the ROI of AdWords campaigns.

Additional Points on ROI

It’s worthwhile noting that it’s possible to attribute the value of AdWords in the purchasing process, even when the final click to the landing page comes from another medium.

Start out by creating specific campaigns to increase awareness, as opposed to the creation of campaigns that are designed to convert potential buyers. By measuring and analysing these results, you’ll soon have an idea of how much AdWords is contributing to sales even when shoppers don’t arrive at your site directly via this marketing channel.

There are also new reporting features in AdWords and in Google Analytics that attribute value beyond the last click. In AdWords, use the search funnel reporting function. In Google Analytics, try Multi Channel Funnels to learn which keywords assist in the final conversion so that you can apply some value to advertising on these terms.

In conclusion, comprehensively measuring the ROI of any advertising medium is never going to be 100 percent foolproof, especially when tracking across online and offline channels. While Universal Analytics will soon be assisting the process of tracking people across multiple platforms and devices, this will by no means close the loop completely. Instead, incorporate a healthy dose of common sense and a keen knowledge of consumer behaviour to help guide your decision making processes.

If there is just one person searching for your product via a mobile device within 10 kilometres of your store, you should be advertising a compelling offer directly to them with AdWords.

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