What quantitative measure best represents top-management goals? Many managers are preoccupied with the measures of dollar sales, dollar profits (net income), and profit percentages. However, the ultimate test of profitability is NOT the absolute amount of profit or the relationship of profit to sales.
The critical test is the relationship of profit to invested capital. The most popular way of expressing this relationship is by means of a rate of return on investment (ROI).
The ROI approach has been used for centuries by financers and others. In other words ROI is one of the most important tools for top management. Why? Because the ROI statistic by itself can be compared wit opportunities elsewhere, inside or outside the company.
The formula of ROI is as follows:
This means in situations where your investment is a Google Adwords Campaign:
A lot of people say that online advertising by way of affiliates or Google Adwords is the most cost effective way to attract new customers for your business. What will be effect on your advertising ROI?
For example: You sell books about dogtraining. The selling price is $40,-. Production and printing costs are $10,-. This means your net income is $30 (40- 10).
Lets say you are advertising on two keywords:
- Dogtraining, average CPC 2 dollar, ctr (click thru rate) is 5%, conversion rate is 8%.
- Train my dog, average CPC 0,50 dollar, ctr 10%, conversion rate is 3%
In this example both keywords have a pretty nice ROI. But when you have only 100 bucks and you can only choose for one keyword, the best choice is the one with the highest ROI.
As you can see all conversion ratios, click through ratios, prices per click and other E-marketing costs will influence the ROI and total profit. But when you have to make a decision, don’t look to these ratio’s alone. Say yes to a specific keyword when the expected ROI is higher than your desired return and reject it when the expected ROI is too low.
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1 Adwords and Adsense combined? | Yargon // Jan 27, 2008 at 12:14 pm
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2 Climente » Blog Archive » El ROAS above the line (1 de 3) // Mar 9, 2008 at 11:54 pm
[…] Google dice que el retorno de inversión en su portal ronda el 180% omite un dato crucial: no está midiendo el coste por venta sino el coste por impacto. Google sabe […]
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