ROI - Return on Investment


ROI, or Return on Investment, is a general financial term which means the excess of revenue over cost in evaluating an expense. One can calculate ROI for any kind of investment - a new machine, hiring another salesperson, etc. In the context of web marketing, though, ROI most often refers to the profitability of pay per click (PPC) advertising.

Some advertisers blindly bid on PPC keywords by guessing at a maximum value. Sometimes it's a "gut" feel, like, "I won't ever pay more than a dollar a click." In other cases, it's a competitive move, e.g., "I'll bid whatever it takes to be ahead of XYZ Company." These advertisers clearly don't measure the ROI of their ad expenses, and may be costing themselves profitable sales (by bidding too low). Conversely, by bidding too high they may be ensuring that their ad expenses never generate a profit.

An advertiser who measures ROI accurately using web analytics solutions can ramp up profitable ads and eliminate losers, maximizing company profits in the process. Of course, some PPC ads are used for purposes that make estimating ROI difficult. For example, if the site doesn't take orders but rather sends inquiries to dealers, true ROI will be almost impossible to measure. (In that example, one would probably calculate the cost per dealer lead and compare that to other lead generation methods.)

Calculating ROI is easiest when the profit can be measured directly. Examples of such sites might include affiliate sites (where the revenue is easily calculated) and e-commerce sites (which take orders and the profit margin on each sale can be readily determined). A common formula for calculating ROI is:

ROI = (revenue - costs) / (ad expense)

Although there are many variations on the formula to allow for different kinds of revenue (pure affiliate profit, product sales from which one must deduct prodcut cost, etc.) ROI values (when calculated the same way) can be used to compare different kinds of advertising, different keywords, etc. in order to determine where to allocate ad money.

To calculate ROI in a PPC environment where there are many keywords and multiple search engines, it is common to use PPC management tools.

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