Paid Search is not about ROI. Technically, it’s not about Return on Ad Spend (ROAS) or conversions either. Paid Search should be about profit. Excuse the SEMI version of Finance 101 here but it’s for a reason. Bear with me…
• ROI = Profit / costs x 100
• Profit = Revenue – Costs
Companies are interested in ROI as it is a percentage return based on capital invested. But Investment in alternative advertising media can by no means provide you with a realistic ROI as the ad spend utilised in the ‘cost’ field does not take into account the product development, manufacturing, distribution and other associated expenses.
Another point to take into consideration is that ‘ROI’ for paid search text ads is often referred to as Return on Ad Spend (ROAS). It would far better be referred to as Return on Ad Investment (ROAI) as opposed to ROAS which can be easily misconstrued to refer to a simple CTR x bid-value amount.
In the world of finance, the lower the ROI the less risky the investment, and the higher the ROI the more risky the investment. This is not true for paid search which depends on bid-for-placements.
The more you bid, the less likely it is that you are risking not getting CTR or conversions. The greater your CTR (in general with a relevant, usable web site) the greater your conversion rate is likely to be. The degree to which revenues increase with cost expenditure is not nearly as linear as one would expect from other marketing media investments due to the auction type nature of these bids, and the immense discrepenacies both in click-through rates and conversion rates across industries simply between position 1 and position 10 in the paid search results.
The following table provides an example that will explain this in a more visual manner. It is hypothetical, but illustrates the point.
The most sensible AdSpend here is not the one which maxes on CTR, nor the one which maxes on gross revenue. Neither is it the option which maxes on ROAI or conversions. It is the one which provides the maximum profit for this particular advertising medium.
This profit can then be applied to the actual costs of product development, production, distribution and associated costs to allow for a true measurement of ROI.
Make your paid search work for you by analysing it in terms of campaign profit. If you do, the results and eventual impact on ROI will be tangible and well worth the ad spend.