How To Effectively Prove Adwords is Making You Money (or Not!)

Is Adwords working for your business? Do you truly know? Or do you just have a gut feeling that it may or may not be?

How do you prove if Adwords is making you money?

This article will give you confidence to immediately find out whether Adwords is working for you or not. This will then enable you to make key decisions about your Adwords future.

With confidence.

She Was About To Stop Adwords!

I started writing this article, then out of the blue a good friend got in touch.

She uses Adwords for her business and it was a perfect example of the way that business owners should not think when trying to discover whether Adwords is working.

The question she asked me in her email was “should we stop Adwords and try something else?”.

What Was Her Reason For Stopping Adwords?

Well, she told me that she’d been looking at her bank statements and was shocked to see how much she had been spending on Adwords.

Now I don’t blame her. This is a common reaction from small business owners. They look at their bank statement and see that Google has taken £xxxx from their bank account. It shocks them.

But the reaction of being shocked at the cost isn’t the right reaction.

In fact it’s dangerous.

I say this because she’s focusing on what she’s spending on Adwords rather than what she’s getting in return. She’s not looking at the right numbers.

We’ll come back to my friend’s Adwords story in a moment.

Will Adwords Make You Money Or Cost You Money?

Every month you need to be able to make really important decisions about Adwords.

  • Do you need to stop Adwords?
  • Do you need to continue to invest the same money into Adwords?
  • Do you need to invest more money into Adwords?

Are you confident that you can answer the key questions above accurately and back them up with real numbers?

The Real Dangers of Making Adwords Decisions

If you’re making key Adwords decisions without the right numbers, then there are real dangers lurking.

Here’s some examples of the Adwords dangers that have happened in real business across the UK and the rest of the world. Maybe you can relate to some of them?

4 Real Dangers (When Adwords ISN’T Working Well Enough):

  1. THE ‘LEAD’ PROBLEM: You continue to invest lots of money into Adwords thinking it IS working. When in fact it isn’t bringing you enough enquiries or sales.
  2. THE ‘MONEY’ PROBLEM: You continue to invest lots of money into Adwords and great news, it IS bringing you lots of enquiries or sales. But because you don’t have the right numbers in front of you, you don’t realise you’re not making enough money to cover the amount spent on Advert clicks.
  3. THE ‘LOTS OF LEADS, BUT NOT FROM ADWORDS’ PROBLEM: You think lots of leads are coming from Adwords, but most enquiries are coming from Google’s organic search results rather than the paid results.
  4. THE ‘TRUST’ PROBLEM: You trust your Adwords manager, but unfortunately sometimes there’s a chance the PPC agency or employee is only showing you the numbers that paint their work in a good light.

Knowing the right numbers is key to making successful Adwords decisions. With the right numbers and knowing how to read those numbers, you can confidently either stop Adwords OR invest more.

How Do I Get Those ‘Right Numbers’?

So we know that we need the right Adwords numbers in front of us to make key Adwords decisions. But what are these numbers that we need?

THE FIRST RIGHT NUMBER: Determining Your ROAS

ROAS (Return-on-Advertising-Spend) is one of the simple numbers that we need. In plain English, with ROAS you’re asking: “did we make back more money (revenue) than we spent on advertising?” If your ROAS number is positive then that’s usually a good sign.

ROAS is also known as Adwords ROI (Adwords Return-on-Investment).

Here’s a ROAS Example. Have a look and then try it with your business.

  1. In 12 months my friend sold £15,200 of services from leads generated from Adwords.
  2. She spent £1500 on advertising via Adwords.
  3. FORMULA for working out ROAS:
    Total Sales from Adwords ÷ Adwords Ad Spend = ROAS
  4. Here is the sum to work out ROAS in my friend’s example:
    £15,200 ÷ £1500 = 10.13 (or 1013% ROAS)

So for every £1 spent on Adwords my friend made back £10.13 – wow.

ROAS can immediately give you an idea of whether Adwords is working for you or not.

TIP: There’s a way you can do ROAS automatically in Adwords instead of manually calculating it. Adwords has a column built in called “Conv. Value / Cost”. This column will accurately give you your ROAS figure as long as you’ve previously told Adwords how much a lead is worth to you. This is done in the Conversion section of Adwords’ settings.

THE SECOND ‘RIGHT NUMBER’: Gross Profit Margin

The ROAS figure we just worked out is an easy figure to get. It’s an easy way to quickly give you an idea whether Adwords is working. So make sure you use it.

But it doesn’t help you judge how profitable Adwords really is. That takes us on to our second number. Gross Profit Margin.

In order to make ROAS a better measurement we need to work out the Gross Profit Margin and then introduce that.

What is Gross Profit Margin?

It measures the profit a company makes per sale and is expressed as a percentage. ‘Selling Price’ minus ‘All costs directly related to making/selling that product or delivering/selling that service.

Gross Profit Margin gives you an idea of the financial success of a particular product or service, and its feasibility. We will also use it to help determine how profitable Adwords is.

Let’s work out the Gross Profit Margin below using my friend as an example.

  1. First let’s look at Gross Profit before we get to Gross Profit Margin.
  2. Average sale value: £1900
  3. The average cost of providing product/service: £684
  4. FORMULA for Gross Profit:
    Total Selling Price – Cost of Product/Service = Gross Profit
  5. So the Gross Profit on an average sale is £1900 – £684 = £1216
  6. GROSS PROFIT = £1216

Now let’s look at Gross Profit Margin as a percentage:

  1. FORMULA for Gross Profit Margin:
    (
    Total Selling Price – Cost of Product/Service) / Total Selling Price
  2. Gross Profit Margin = (£1900 – £684) / £1900 = 0.64 (64% Gross Profit Margin)
  3. GROSS PROFIT MARGIN = 64%

What’s Included In The Product/Service’s Cost?

Let’s take a step back. What’s included when working out the cost of providing the product/service?

When working out the cost of that product/service, you only include costs that are directly related to the making of a product or delivery of a service.

So for a product it would include materials used to create it and direct labour costs need in creating it. It doesn’t include distribution costs, sales force costs, marketing costs or general overhead.

If you have a professional services business then you’ll find that it does not require substantial materials or raw goods to deliver your service to your client.

TIP: Remember that perfection will probably hold you back when calculating the costs of your product/service.You’ll spend too long trying to work out what is and isn’t included and never finish. Simply remember that whatever you include must be directly related to the making of a product or delivery of a service.

AND NOW WE HAVE GROSS PROFIT MARGIN. HAPPY DAYS!

THE THIRD ‘RIGHT NUMBER’: Determining Your Break-Even ROAS

The ROAS figure (Return on Advertising Spend) previously worked out doesn’t help you judge how profitable Adwords really is. That’s because profit isn’t taken into account.

We need a new ROAS number to help us take profit in to account. This is where Break-Even ROAS comes into the picture. And this is where we use the Gross Profit Margin value we just worked out.

Break-even ROAS is the point at which, what you spend on Adwords equals what you’re earning through Adwords. Anything above your Break-even ROAS helps you to prove that Adwords is working.

And to work out Break-even ROAS we first need to know the Gross Profit Margin.

This is simple now that we have the Gross Profit Margin.

  1. FORMULA for Break-even ROAS:
    1 ÷ Gross Profit Margin = Break-Even ROAS:
  2. Using the figures from my friend’s example we get the following Break-Even ROAS: 1 ÷ 0.64 = 1.56 (or 156% Break-Even ROAS)

How Do We Then Use Break-Even ROAS?

Our break-even ROAS number above means my friend needs to make £1.56 for every pound she’s spending in order to break-even. £1 is 64% of the break-even point of £1.56.

How Do I Now Find Out If Adwords is TRULY Working?

If we go back to the ‘First Right Number: ROAS’, we will see that the main ROAS figure of 1013% in my friend’s example, is way over her ‘break-even ROAS’ of 156%. That means that Adwords is working really well for her – she’s making money.

In general terms, if your ROAS figure is greater than your ‘Break-Even ROAS’ then Adwords is working and making you money. If your ROAS figure is less than your ‘Break-Even ROAS’ then Adwords is probably losing you money. And you need to either work out how to improve Adwords, or stop it entirely.

What ROAS is considered good? Many are happy with 300%, even more so if they can get 500% ROAS.

The Single Worst Thing You Could Do Now

The worst thing you could do now is think, “great I now know how to prove if Adwords is making me money or not” and then go away and don’t do anything.

If you’re serious about Google Adwords and increasing your sales, then make sure you know the “BIG THREE ‘RIGHT NUMBERS’” and use them to answer questions like these:

  • Do you need to stop Adwords?
  • Do you need to continue to invest the same money into Adwords?
  • Could Adwords be working harder for you?
  • Do you need to invest more money into Adwords?

We’ve put together this checklist to help you take action today.

CHECKLIST: “IS ADWORDS MAKING YOU MONEY?”

  1. Work out: THE FIRST ‘RIGHT NUMBER’ ROAS – Return-On-Your-Advertising Spend
  2. Work out: THE SECOND ‘RIGHT NUMBER’: Gross Profit Margin
  3. Work out: THE THIRD ‘RIGHT NUMBER’: Determining Your Break-Even ROAS
  4. Now that you know Adwords is profitable or not, use the context of that information to start making important decisions about your Adwords future.

 

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