Forget ROI - Just Give me Profits

Posted: February 28, 2004

I just finished putting together a report from some experimentation done with one of my accounts. I found the results interesting, and thought some here might find them interesting as well.

This is a site that I’ve been working on since pretty much the beginning of AdWords, so I’m very familiar with the KWs and ads for it.

I often find that people look at ROI over the bottom line, when its the bottom line that means more to me.

Average Sale Price: Roughly $200 (Numbers have been rounded off )

Average Position	CTR	Clicks	CPC	Spend	Profits	ROI	Conversion Rate	Sales
1.1	16.5%	993	$3.25	$3227	$744	23%	2.0%	20
3.5	8.1%	512	$2.68	$1272	$1187	87%	2.5%	13
7.6	2.2%	122	$1.12	$136	$644	471%	3.2%	4

If we went by straight ROI, the 7.6 position is the way togo, however, position 3.5 makes $543 more over the trial period, and I’d rather have that bottom line. Even position 1.1 ends up with a higher profits than 7.6 with a much lower ROI.

As expected, there is a significant conversion difference between the various positions. The CTR of the ad in the premium position, admittedly, did surprise me. And therefore the CTR difference between position 1.1 and 3.5 was quite significant. The CTR of position 7.6 was around my projections.

But we really aren’t done yet. This site’s visitors usually buy more than once during a year, without going through the math of actual returning customers, I’ll simplify it saying that it averages 1.3x per customer per year. So
1.3 x $200 x #Sales - AdWords spend
is what we should consider. This leaves us with this profit:

1.1 position: $1972
3.5 Position: $2007
7.6 Position: $903

Clearly 3.5 is the best position for this particular product. However, (and this is where egos come into play), the difference between being first and on the side is minimal, and those would be sales that your competitor didn’t get. If the projections were made into year 2, then position 1.1 is definitely the way togo as those returning in the 2nd year will definitely make the profit margins worthwhile.

However, position 1.1 must maintain that conversion rate. Any drop with that CPC and the site will quickly get into trouble. Position 3.5 can drop the conversion rate a little and still be quite profitable due to it lower spend than the premium position. In fact, if its conversion rate drops to 2%, its still as profitable as position 7.6 in the short run, and better in the long run.

If this site offered a newsletter to keep in contact with former buyers and help to increase the average buys/year/customer, then I would definitely suggest the top position for the sheer volume of sales and therefore, a higher projected number of signups than the other positions.

In any case, enough ranting for now, don’t measure everything by ROI. It is definitely a measuring tool to be used, but don’t forget about the bottom line.

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Written by Brad Geddes aka eWhisper · Filed Under Blog, Google AdWords, PPC Info

Comments

2 Responses to “Forget ROI - Just Give me Profits”

Profit by Impression : The real metric in PPC testing » bgtheory.com on July 6th, 2006 6:04 pm

[...] Profit should be a metric that looks at a campaign holistically. If you want to look at individual parts of a campaign, you should also look at individual parts of the profit. (If looking at an entire campaign, please read:Forget ROI: Show me the Profits) [...]
Search Engine Land: News About Search Engines & Search Marketing on February 4th, 2008 7:15 am

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