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7.4 Measuring ROI

How to measure ROI (Return On Investment) with Google Analytics

In this section, we’ve emphasized the importance of applying a comprehensive measure of cost factors. You need to bear in mind that Google Analytics does not do this by default. Look at its AdWords reports for example: once you’ve linked your AdWords and Analytics accounts, click the Reporting tab in Analytics, click Acquisition in the sidebar, and select AdWords > Campaigns. You’ll notice that one of the columns is headed “Return on Investment”. This is simply your total Goal value minus your AdWords costs, divided by those costs. It doesn’t take account in any way of the costs of the sale – in the case of manufactured goods; for example, this would include the costs of materials and manufacturing of all the items sold, in addition to advertising costs. So, at best, although the report column is headed “Return on Investment”, it’s more appropriate to think of it as Return on Ad Spend.

To put it another way, the problem with Return on Investment is the ambiguity of both the terms “return” and “investment” (in this context, costs). In Google Analytics, the investment is simply how much you spend with Google and the return is the total amount of money made by your business or top line revenue generated from advertising spend. In Google’s world, this is appropriate enough: since Google definitively knows only these two inputs for your site, this is all it is responsible for reporting. But neither of these definitions is adequate.

What really matters to a business is profit, and determining profit is a more complex calculation, which may well vary from case to case. Costs include advertising and marketing spend, yes, but also cost of goods sold plus your fixed costs and operating expenses. In the context we’re concerned with here, your fixed costs will need to be distributed across all your marketing activities, so paid search won’t account for 100% of your fixed costs unless it is 100% of your sales. Some fixed costs (such as PPC agency fees) will be 100% attributed to paid search, but others (such as website hosting fees) will not.

Conversely, the “return” side of the equation might also be more complex. The simple definition doesn’t, for example, take any account of the “lifetime value” of users. Customers typically purchase more than once, so if the same user later spends more money with your site – say half as much again – then your return from the same ad spend is 1.5 times greater. This is difficult to incorporate into standard reporting, if only because the time-scale may be significantly greater than your typical reporting period, and there might be many different types of interactions involved in the path to a user’s subsequent conversions.

The lesson, ultimately, is that Google Analytics is a set of powerful tools and not a template for business success. It measures what it measures, but it’s no substitute for your own judgement and business savvy. As marketing consultant Jeff Sauer puts it:

“While it is a thing of beauty to be able to use a single tool for multiple levels of analysis, we also need to know that there is more to running a successful business than minding the reports provided in Google Analytics. This is a lesson that I learned the hard way as I ran an e-commerce business that appeared to be successful in Google Analytics, yet failed to make a profit in real life.” [1]

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References:

[1] http://www.jeffalytics.com/true-roi-measurement-e-commerce-websites-using-adwords-google-analytics-excel/

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