How To Mathematically Calculate ROI and ROAS

Isaac Rudansky
A free video tutorial from Isaac Rudansky
Certified Google AdWords Pro |Co-founder of AdVenture Media
4.6 instructor rating • 4 courses • 203,137 students

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24:39:03 of on-demand video • Updated November 2018

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English As long as your are wise above 100 you're making money. If it's exactly 100 you're breaking even if it's below 100 you're losing money. OK. And on that note let's talk about something of a slightly different example. OK let's say for example the race this year. Let's talk about a case where we actually have a lower profit margin. OK. Let's say we're not as good of a business. We don't have that type of business that has a 70 percent profit margins. OK. Let's say for example our profit margins were only 40 percent. OK. The tables have been turned on us. So we have a 40 percent profit margin which guys tell me how much of that is cost if my net profit margins are 40 percent and obviously 60 percent is 60 cents on the dollar goes to the costs. OK so I have a little bit more of an expensive business to to advertise for now I want to do the same exact mathematical calculation the first thing I need to do is figure out this number here. What is my cost what does my cost of what does my cost to the business. Okay. And just for clarity sake missed the bottom because this is really cost of adds this cost is the cost of doing business. So I do the same thing right. So I take my total ad spend. I'm sorry am I to take my total conversion value right which is 1 4 3 2 1432 and I to get my cost of doing business. I have to multiply that by point 6. Okay that is how I get the cost of doing business for these profit margins. And if you do the math in your calculator 14:32 multiplied by point 6 comes out to 859 20. Okay. So at least 59 20 now they need to do is plug in my R Y calculation. So our y equals revenue which is 14:32 minus 8 59 20 divided by my cost of ads which is in 97. And you know what we get when we plug in these numbers here we get a total and we put this in red because its a red number. Red is bad 0.6 3 right. Hope you're falling. I hope you're following along with your calculator. And this is our our ally for the same conversion value but with different profit margins right the same and spend the same conversion value but we changed around our profit margins. Now instead of pocketing 70 cents we only pocket 40 cents on the dollar. And this is a point 6 3 are A-Y which means we're losing money. Overall the accounts were losing money. OK. That's what our ally means over there points x 3 meaning what does that mean for every dollar we spend . We only make it 63 cents back. So we're losing money. We're losing 37 cents every time we spend a dollar in advertising. Now that doesn't necessarily mean you shut off your campaigns. In fact in most cases it doesn't because there's other types of value that a client brings. You have to think about word of mouth referrals. You have to think about the value of your company getting more exposure. It might be perfectly fine to have a point six percent are awash. It totally depends on your marketing goals and your business goals. It really really depends and it's greatly influenced your marketing goals your business goals are greatly influenced by what would be an acceptable or a Y or what would be an acceptable Aroha Yes. And once again if you don't have profit margins if your company sells digital goods and there is no real cost of service in the client then our OAS is the way to go. Return on ad spend just look at your conversion value and determine the profitability of your account using the ROV as calculation. That's perfectly fine. Now one weren't very very important factor here. And let's do a little bit of racing. We want to figure out what is our break even point. If I know my profit margins it will be a great piece of information to know how much it will be a good piece of information to know how much I can spend or how much I need to spend to break even. That's called our break even point. How do we determine what our break even point is. And that's actually a really simple thing to do. But once again even before we do that you still need to know what your profit margins are. That's one thing that Edwards cannot tell you. You need to sit down and figure out exactly what your profit margins are. But once we know our profit margins we're able to easily calculate what are what are our A-Y needs to be. So for example let's talk about a case where our profit margins are on say 40 percent. Okay. So our profit margins are 40 percent and you don't need to have run an average account to know this . This is something which you could determine well before you run your advertising Edwards account. I know that if I sell a product or a good or service for $100 and my profit margins are 40 percent that means I've made $40. It's very straightforward very simple. OK. So but how much do I need to make for every dollar spent advertising to break even with a 40 percent profit margin. So the calculation for that is really simple. OK. You just simply divide your profit margin into one. So it's one divided by point four. And for those of you who know math it's an easy answer for those of you who don't simply jump out crank out a calculator that equals two point five. OK. 2.5 is my minimum or why r y s in order to break even. Or in other words this is also the same thing as saying 250 percent. What you're saying is in order for me to be profitable I need to make back two dollars and fifty cents for every dollar spent on advertising. Why. Because if you think about this way I'm going help you understand what this number is for every two dollars and fifty cents you make right for every two thousand fifty cents of sales. You only make a dollar because that's your profit margin. Right. You're only making 40 percent of that. So that's a dollar and then you subtract the dollar for the ads and you left with zero. So that's your break even point. OK. You spent a dollar. You may 2000 50 cents and you come out being equal at zero because for that two dollars and fifty cents that you made you profited $1 and then you have to pay Google that a dollar for the ad that you spent . OK so in order to be true in order to break even or you need to be making at least you need to be making at least 2000 50 cents an advertising in order to be profitable with profit margins of 40 percent. You need to be making anything above 250 if you're making 251 you're profitable to a penny. OK. And so on and so forth. So that's how you calculate your break even point. So this introduction to our A-Y are away as is crucial to help you be able to start understanding how to calculate your profits once you're tracking conversions and you had your conversion values in place . And you know your margins you could really intelligently calculate how successful your hours campaigns are and this is when you really begin to get a sense of how you're doing and where you can improving your account. You'll be able to find certain keywords have a really low R-N.Y certain key words have a really good ROIC even though the costs per click might be much much more expensive for the better or for the higher our keywords and usually. And actually that's usually something you're always going to find frequently because the better keywords that generally lead to more sales are also the keywords that your competitors are advertising on more aggressively. So you might find certain key words with much higher cost per click. But really they're the ones that are driving business and that not only do you know that they're driving business you'll be able to know the profitability by using ROI and ROAS knowing your margins making sure conversions values are being tracked. So that's a very good foundation from which we're going to be able to eventually create profitable Max CPC bids in the next video. Let's walk through understanding a profitable business strategy how to look at revenue per click and how to use the information the historic data in your account to determine what your max CPC bid should be. We'll see you right back here in a couple of minutes. As always guys thank you so much for watching. I hope this was a really good one. This stuff is really really exciting for me and cheers for now and I will see you very soon. Thanks