Calculating your ROI for your AdWords Campaign isn’t as straightforward as it might seem.

If you have Google Analytics, you’ll notice that there’s a default tab that shows the ROI of AdWords.

However, according to Brian Clifton, there are a couple of issues with this:

  • Google Analytics combines your total revenue from both your transactions and goals. This could potentially lead to double counting. For example, if a user on your site adds something to their cart, it becomes a “monetized goal.”
  • In addition to this, Google assumes that all your revenue is profit since it can’t add in the costs of your business.

Here’s an example of a Google AdWords ROI report:

Source: Brian Clifton

ROI here is calculated as revenue – cost / cost.

In the example Brian gave, you’re making 500% ROI if your revenue is $600 from a $100 ad spend. There are a couple of things to be aware of here:

  • When a product on your site is purchased, you might have both e-commerce revenue and a goal value captured for a single transaction (depending on how Google Analytics is set up on your site). The default ROI calculation performed by Google Analytics includes all types of revenue (transactions & goal values). This double counts revenue, which can throw off your numbers.
  • Notice that in “Keyword 1” in the first row of the Google Analytics screenshot above under the “ROI” column, there’s the number 823.33%. This means that you can spend 9x as much on AdWords and still see positive ROI. Of course, this isn’t true.

According to Brian, there’s a massive difference between the default ROI listed in Google Analytics for each keyword compared to the real ROI.

Source:Brian Clifton

Your real ROI calculation should also factor in your profit margin. The formula for this would be revenue x margin – cost / cost. In the example Brian gave, if your profit margin is 0.4 and your revenue and cost are $600 and $100 respectively, then your ROI would be 140%.

In other words, you can afford to spend 140% more on AdWords and still see positive ROI. However, if you just relied on the number in Google Analytics, you’d think it would be 500%