AdWords Value Formula

Recently I have focused my primary reporting for clients into a simple shared spreadsheet that I call an “AdWords Value Formula”.

I work with small businesses for the most part, where owners, managers, and staff wear many hats. Simple reporting counts for a lot with such folks, because time is the limiting factor.

A simply calculated profit and loss statement when it comes to AdWords is an excellent piece of information for any business.

Sometimes the hardest part is making the first assumptions. Those assumptions, while necessary, can also be somewhat inaccurate. You have to start somewhere.

Defining a “conversion” can be its own exercise; but for this example a conversion is defined as an online sale. In this case each sale is worth an average of $50 retail. A cost factor might include cost of goods sold, labor, etc., figured as you will. In this case I am assuming a 50% cost factor.

It might look something like this in narrative form:

-Data shows 10 conversions for a particular time frame accredited to AdWords.

-Assuming the $50 average sale, retail sales accredited to AdWords should be $500. Apply a 50% cost factor for this generic example and you have $250 dollars.

-Data shows your AdWords ad buy for that same time frame was $100. Subtract the ad buy from the after cost factor ($250) and you now have $150.

-Next subtract any AdWords management fee (such as me!), or appropriate value of labor if your AdWords Management is done in house. Let’s say you paid $20 for AdWords management/labor during that period. Subtract that number from $150 for a total of $130. This will be your net “profit” within the current accuracy of our assumptions

These calculations can be represented easily in a spreadsheet. Call it ROI (Return on Investment), or ROAS (Return on Advertising Spend), or simply Red vs Black. A formula like this is as common in the world of larger corporations as it may be rare in the larger small business world.

When each of these calculations is tailored to the individual endeavor or client they create a big bang for the time it takes to take a look at the data. Also AdWords optimization efforts can then focus on profit as the primary metric and serve as a common language between parties.

I end where knowing the value of your AdWords buy begins. Use good metrics to do more measuring and less assuming. The rest is just doing a little math.

AdWords Value Formulas love AdWords Conversion Tracking and Google Analytics, especially Ecommerce!

-Tom Hale
AdWords Specialist
Thomas Creek Concepts