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So I have an AdWords campaign with the following numbers:

Total Sales through Ads: 630000 Cost of the goods: 590000 Cost of Advertising: 22500

If I follow AdWords ROI formula, I have a ROI of 2.85%: (Sales – Total Cost)/Total Costs = (630000 – 612500)/612500.

But I understood that ROI was Profit / Investment and that’s how I saw it in many places. Which would be a ROI of 77%: (Profit – Cost of Ads) / Cost of Ads = (40000 – 22500) / 22500

I even saw a formula stating ROI which would be a crazy 2522%: (Revenue – Cost of Ads) / Cost of Ads.: (630000 - 22500)/22500

So if someone asks me for my PPC ROI in AdWords… what should I say? Really confused here. I would like to be the most accurate possible in my answer.

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  • You're analyzing the return on the $22,500 advertising cost, correct? What were the sales BEFORE the cost of advertising? I would evaluate only the net gain between sales before advertising and sales after advertising and use that as your numerator in the formula.
    – David Espina
    Commented May 26, 2018 at 14:04
  • Hi David, thanks for your reply. So I'll clarify, the total sales (not profit) on that month were $1,200,000, of which $630,000 were acquired through Advertising in AdWords. The rest was acquired through other channels and organic search, but I would like to know the ROI of those sold through advertising in AdWords.
    – user32533
    Commented May 26, 2018 at 14:16
  • Is the cost of goods sold only applicable to the additional $630,000 in sales? If so, then your ROI calculation would 77% as you indicated. I think your second formula is incorrect.
    – David Espina
    Commented May 26, 2018 at 14:20
  • Yes indeed, the cost of the goods of those $630,000 sales. So the whole scenario is: I paid $590.000 for getting the goods, Advertised them on Adwords spending $22.500 and sold for a value of $630.000. The 77% made more sense to me, just I felt surprised to see how AdWords calculate its ROI: support.google.com/adwords/answer/1722066?hl=en Using this formula my ROI would e 2.85% -.-
    – user32533
    Commented May 26, 2018 at 14:28

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Don't Conflate Profit with Return on Investment

In general, Profit = Revenue - Expenses, but there are various kinds of profit, and accounting practices are (for the most part) outside the scope of this site. However, since a given advertising campaign could technically be a project that a project manager would need to report on, it may be useful to understand what's actually being reported.

What's happening here is that you're apparently conflating "profit" with return on investment (ROI) for your advertising dollars. They aren't the same thing at all. What (Profit – Cost of Ads) / Cost of Ads tells you is the return on investment in advertising, nothing else. It doesn't calculate your business profit, nor your overall return on investment. It's just a data point for evaluating your advertising program, that's all.

As an advertising channel, Google isn't really telling you how to value or model your business. Adwords is just offering various models for expressing the utility value of their platform on your overall business, on ad dollars, on clicks, and so forth. In other words, they're making suggestions about how they'd like you to value the money spent with them. It's up to you to determine if a specific ROI calculation makes sense in your case, and if it fits the information you're trying to convey to the target audience for your advertising campaign's project report.

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  • Thanks Todd, I think this is what I was looking for. I finally understood the confusion as I thought ROI was a plain formula used on all different scenarios. It kind of is, but with some differences. For instance, ROI in advertising doesn't takes into consideration the cost of goods, while of course ROI in the company in general takes into consideration everything. I wanted to know my ROI in advertising only, so I guess 77% is the right calculation. Thanks a lot for the reply
    – user32533
    Commented May 27, 2018 at 3:24

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