What makes paid search so fantastic is its accountability. The fact that you can so clearly see the revenue generated by a campaign against click spend, on the face of it, makes measuring return on investment relatively straightforward for retailers.
However, in many cases, just doing a simple revenue against click spend formula will not tell you the entire story. I am going to explain how we calculate the return on investment (ROI) at Leapfrogg in order to understand the true value of a paid search campaign.
Calculating costs
When calculating the true ROI of a paid search campaign, there will always be additional costs on top of the basic media spend (i.e. clicks). This is especially true if there are third parties involved, such an agency managing the account or where advanced technology and attribution tools are being used.
Even if you are managing your account in-house, it is likely that somebody is being employed to look after it (I hope so anyway!). How long are they spending on it each week/month? These staffing costs should always be accounted for in any ROI calculations.
For retailers, there are also other costs involved which come at the point of sale, for example the cost of any discounts applied (and therefore the impact on margin) and delivery costs. If you want to calculate the real value of paid search, these need to be taken into consideration.
Another cost to factor in, which is so often ignored, is returns. If 10% of all orders are being returned this can significantly alter the profitability of a campaign.
Calculating revenue
Reporting on revenue can be more complex than you think. Most analytics tools report on revenue using the “last click wins” model, which means that the last visit to the site (and therefore traffic source) is credited with the sale.
However, in the multi-channel world that retailers now find themselves operating in, most customers are likely to visit the site on numerous occasions via a number of different channels before converting. This is where the “last click wins” model discounts any sales which involve more than one interaction with the site in the user journey.
In Google Analytics, the multi-channel funnels report will show you a breakdown of sales by “last interaction” as well as “assisted” (which involve more than one visit to the site). If you are not already familiar with these reports, I would recommend reading our blog post on multi-channel funnels.
We usually report on revenue by separating out “last click” sales and “assisted” sales, however some clients have different attribution models depending on the complexity of the user-journey. For example, assisted sales could mean only sales made on a “first click wins” rule, or could include only those sales where the user’s last interaction with the site came on a brand term or by a direct visit to the site.
This is why it is important to agree on a sensible sales attribution model before you start reporting on sales and revenue. Many different channels (i.e. search, affiliates, email, display, etc.) will all be competing for the conversion and you have to be careful you don’t end up over-reporting on sales.
To take your reporting even further, we would also recommend calculating the lifetime value of a paid search customer. How many of these new acquisitions go on to make a repeat purchase? We found that 17% of new customers from paid search went on to make a repeat purchase for one of our clients. This sort of data is valuable and could alter the price you are willing to pay for a click when you understand the true value of a new customer.
And what about offline sales? If you have tracking mechanisms in place (such as voucher codes or call tracking) to attribute in-store or telephone sales back to paid search activity, you are in serious multi-channel ROI heaven!
Conclusion
In summary, calculating the true value of a paid search campaign is not an easy task but by doing so you’ll be in a far better place to make much informed decisions on the development of your paid search strategy and the price you are willing to pay to acquire a new customer.
How do you report on ROI?