Quick Math : ROI For E-Commerce Via SEA

> how much your online advertising brings in?

Let’s learn how to calculate and compare the ROI (Return On Investment) for 2 different online ad campaigns : Display advertising (banner) versus Sponsored Link.

Context :

  • Order made by a customer : 30$
  • Gross margin on that order : 6$
  • Display – CPM (cost per mille – price for the banner being displayed 1,000 times) : 2$
  • Display – CTR (click though rate) : 1% (so 1 click is about 0.20$)
  • Display – Conversion Rate : 4%
  • Sponsored Link – CPC (cost per click) : 0.10$
  • Sponsored Link – Conversion Rate : 3%

Your web analytics tool you’ll get to know whether that purchase was made by a customer who arrived on your site thanks to a display ad banner or a sponsored link. Accordingly you can calculate the ROI for each lever !

Calculation :

Display ROI = [margin / (CPM / CTR x 1,000)] x Conversion Rate

= [6 / (2 / 1% x 1,000)] x 4%

= +20%

.

Sponsored Link ROI = [margin / CPC] x Conversion Rate

= [6 /0.1%] x 3%

= +80%

Conclusion :

These two formulas are essential to remember.

Note that WA tools (ex. Google Analytics) do NOT take in consideration the notion of multiple visits – i.e. when a user makes a 1st visit via a banner, a 2nd one via a sponsored link, a 3rd one via direct access, etc…

In other words, a conversion (= achieving a goal, ex. a purchase) will be attributed to only one channel. That’s how you might keep in mind that every single visit is important for conversion: be careful with suppressing or reducing advertising budgets that necessary for conversion process.

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2 thoughts on “Quick Math : ROI For E-Commerce Via SEA

  1. Interesting formulas.
    I agree with the fact that each lever must be calculated differently.

    New Google analytics features allows to attribute values to different conversion chanels but it’s quite complicated.
    With a good template you can get a sort of “multi channel ROI”.

    But the online ROI still depends mostly on the way that a company wants to calculate it…

    • Thanks for the tip, I didn’t know Analytics could deal with that ! I’m currently working on the Google Analytics certification so maybe I’ll learn how to set it up well ! Indeed online ROI is an important issue for e-commerce…

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