Marketers tend to pay all their attention to metrics, such as website traffic, views, and engagement.
But all that means nothing if it doesn’t help in lead generation and conversions. While running marketing campaigns, your prime focus should be on getting returns at lower costs.
That brings us to two important metrics - return on investment or ROI and cost per lead (CPL). The numerical data derived after calculation will help you plan your marketing strategy and optimise business goals accordingly.
However, most marketers struggle when it comes to calculating ROI and CPL accurately. That’s why we’re here today with a comprehensive guide on how to calculate CPL and ROI in Google Ads. Additionally, we’ll highlight ways to improve these metrics (reducing cost per lead to increase ROI) to help you get the most out of your ad campaigns.
So, let’s begin!
Calculating ROI And CPL In Google Ads
Return On Investment (ROI)
In short, ROI refers to the amount of profit made from your Google Ads campaign. And knowing which ad campaign offers the best return on investment will help ensure that your budget is allocated appropriately. This will enable you to focus more on investing in ad campaigns that will emerge successfully.
That’s why it’s important to calculate ROI on Google Ads campaigns. Whether it’s used to generate leads, drive valuable customer activity, or increase sales, you can use the calculations to evaluate if your investment is making the estimated profits.
How To Calculate ROI In Google Ads?
Now, ROI is basically the ratio of the net profit to the overall costs. But the exact method to measure ROI will depend on the specific marketing goals of your Google Ads campaigns.
Let’s consider one such formula - take the revenue obtained from your Google listings and ads, and subtract it from the overall costs. Then, divide that by the overall costs.
So, ROI = (revenue - overall costs)/overall costs
Now, consider, for example, a product costs $100 to make, but it’s sold at $200. You end up selling ten of them as a result of promoting them on Google Ads. So, your total sales are $2,000 and say you spend $200 as an investment in the Google Ads campaign.
The ROI will be ($2,000-($1,000+$200)/($1,000+$200) or 66.6% approximately.
Based on the calculations, it’s important to note that the cost of physical products you sell to the export market is equal to the manufacturing costs of all the items plus advertising costs. And while the revenue is the amount you make from selling these products, the amount spent for each sale is known as the cost per conversion (CPC).
Now, if the business generates leads, the overall costs are just your advertising costs, and the revenue is the amount made on a lead. For example, if you make a sale for every ten leads, and the sale is $20, then each lead will generate a $2 revenue on average.
Also, note that the amount you spend to generate a lead is known as the cost per acquisition - another metric used to determine the success of a marketing campaign.
Does Calculating ROI Help?
As mentioned earlier, knowing the return on investment of your businesses Google Ads campaign will tell you how much money the campaign has generated. Accordingly, you will be able to make informed decisions on the allocation of your marketing budget.
Calculating ROI will help determine if you should spend more money on successful ad campaigns. Similarly, you can pay less on channels that are not providing the desired results. You’ll also be able to alter your marketing strategy and make marketing efforts accordingly to improve the less successful campaigns.
How To Get The Measure Of ROI?
To measure the return on investment on the Google Ads campaign, you will need to measure the customer action valuable to the marketing channel. These actions are also known as conversions, which include web page visits, video views, number of leads, sign-ups, and purchases.
You may track the number of clicks leading to conversions using tracking tools like the Google Ads Conversion tool. This will help you determine if a keyword or an ad is profitable. You will also be able to track the conversion rate and cost per conversion.
After you measure the conversions, you may begin evaluating the ROI. Keep in mind that the value of each conversion should be higher than the ad spend.
For example, you spend $10 on clicks for a sale, and you get $15 for that sale. So, you’re making a $5 profit, which is a good return on your investment.
Cost Per Lead (CPL)
As a marketer, your goal is to attract new leads and customers in a cost-efficient manner. For example, if you’re spending $50 to get a lead that’s worth only $25 - you’re not getting a positive ROI on the ad spend.
That brings us to the concept of cost per lead or CPL - one of the most crucial digital marketing metrics. It’s the amount of money you invest to generate new leads. CPL is also used to determine the effectiveness of your content marketing strategy and Google Ads campaign.
Knowing the cost per lead will help you make informed decisions when it comes to improving marketing strategies. You might even be able to identify the methods and channels, which are over-priced and yielding low results.
Long story short, calculating the cost per lead (CPL) for your Google Ads campaign will help you find better ways and channels to market to the target audience. Whether you’re generating leads via inbound marketing efforts or collecting a list of potential customer names, determining the CPL will help you track your marketing budget.
How To Calculate Cost Per Lead (CPL) In Google Ads?
Cost per lead (CPL) is one of the most commonly used marketing metrics that can help gauge the effectiveness of any marketing campaign, be it on social media or any other marketing channel. And if you know the formula, calculating CPL is relatively simple.
All you have to do is add up your marketing spends, add up the new leads, and then divide the marketing spend by the new leads. So, as per the formula:
CPL = total marketing spend/new leads
Here, the total marketing spends will be the sum of your ad spend, time, and third-party expenses.
Once you know the average cost per lead (CPL), you may set realistic and attainable digital marketing goals. Having a clear CPL target will also determine how much you’re willing to spend to achieve your marketing goals, impacting the way marketing efforts are made.
You might use a different marketing strategy for doubling the overall revenue than you would to maximise profits.
With that being said, let’s now take a look at an example. Say $3,000 is your total marketing spend every month. And with the appropriate marketing efforts, you generate 60 new leads per month. So, you’ll be incurring a cost of $50 per lead.
This will help determine if the CPL is reasonable or there’s an adjustment needed. More on this in the following sections.
Cost Per Acquisition (CPA) Vs. Cost Per Lead (CPL)
As a marketer, you might confuse CPL with cost per acquisition (CPA). Both are similar, but the cost per acquisition metrics apply to the leads further down the marketing funnel. It’s defined as the total cost of acquiring a new customer through a specific ad campaign or channel. And it’s related to the total social media and ad spend on a Google Ads campaign.
How To Calculate CPA?
The formula of calculating CPA is similar to that of calculating CPL.
So, CPA = total money spent on acquiring new customers through a specific channel/ the number of customers acquired through that channel
And to calculate the media spend of a campaign, simply replace “money” with “media.” This changes the formula to:
CPA = total media spent on a new channel/total number of customers acquired by the media
Now, consider, for example, you spend a total of $750 dollars on a paid ad campaign, and you generate five new customers from it. So, the cost per acquisition (CPA) will be $750/5, i.e., $150.
ROI Vs. CPL: What To do With The Numbers?
CPL and ROI are the two most important metrics that help marketers make better decisions and strategies for their inbound marketing campaigns. So, start by comparing the content marketing ROI to the ROI of your other marketing channels.
If you notice the content marketing plan is outperforming the other marketing methods, then you’re going on the right track. And if the plan is not performing as expected, determine the reason - it might be because of the topics, promotion strategies, or keywords.
For example, you might have to remove cost per click (CPC) ads and replace them with social media marketing. This will lower expenses yet boost website traffic, leading to higher conversion rates and ROI.
Moving on to CPL, your first priority is ensuring that the calculated cost per lead is within your budget. But for that, it’s important to know how much you can afford to spend on a lead. For this, you have to calculate the CLV or customer lifetime value.
This is a one-time deal in eCommerce channels, for example, a customer makes a purchase and then they are gone. It’s easy to calculate the CLV in this case; after all, it’s just the total price of the single purchase. On the contrary, for subscription-based products, the CLV will increase based on the duration the customers continue their relationship with your company.
In such a scenario, you’ll have to determine the average profit per customer using the available numerical data. Consequently, calculate the cost to take care of the customer for the duration they maintain a relationship with you. This will help you get the profit margin.
In short, knowing these two metrics - average profit per customer and the customer lifetime value will give you a clear idea of how much money you can spend on a new lead. The number will indicate the maximum amount you can afford, but that doesn’t mean you can’t spend more than the specified limit.
That said, always review your business goals to allocate resources appropriately and continue to calculate the ROI to monitor the campaign’s progress. You can then make adjustments as and when needed.
How To Calculate CLV?
To calculate the customer lifetime value, you’ll need to divide the average monthly revenue by the customer churn rate. And then multiply the answer by 100 to get the result in percentage.
Here’s the formula to simplify your calculations:
CLV = (average monthly revenue/ customer churn rate) x 100
And to find out the churn rate, you’ll need to add the number of customers in the month and subtract the number of customers who retained their subscriptions. Finally, divide the result by the total number of customers.
Now, consider this example: your monthly income is $60,000, and the number of customers in the month is 1,000. So, the average monthly revenue per customer is $60,000/1,000 = $60.
Next, suppose the retention rate is 950 customers; you can easily calculate the churn rate, i.e., (1,000-950/1,000) = 0.05
So, the CLV = $60/0.05 = $1,200
How To Calculate The Average Profit Per Customer?
Let’s now move on to calculating the average profit per customer. The formula is simple:
Average profit per customer = CLV - (average monthly expense per customer/ customer churn rate)
Now, suppose you spend $5 per month per customer and an additional $30 per customer for overhead expenses, such as rent and utilities. If the CLV is $1,200 and it costs around $35 to take care of them in addition to the overhead costs, then the average profit per customer would be:
1,200 -($35/0.05) = $500
So, the average profit per customer here is $500.
How To Determine The Budget Per New Lead?
It’s important to note that not every lead can be converted into a customer. With content marketing, you might be able to generate leads and get them to visit your landing page, but they might not be interested in buying the product or service the company has to offer. This is something that should be taken into account while determining how much money you can spend per lead.
There is a formula for this as well that will help you allocate resources accordingly, which is:
Maximum cost per lead (CPL) = average profit per customer x (closed monthly sales/ monthly leads)
Now, suppose you generate 500 leads every month and convert 50 of them into customers. In that case, the maximum cost you can spend per lead is:$500 x (50/500) = $50.
If you spend anything more, you’ll be losing money. And for determining the actual CPL rates, you’ll need to focus on business goals. For instance, you may not mind higher CPL rates with thinner margins if the plan is to grow your customer base. But for more revenue or ROI, the CPL should be as low as possible.
Improving The ROI And CPL Numbers
When it comes to improving ROI and CPL numbers for lead generation, better conversions, improving the content on the marketing channel should be your primary focus. Next, focus more on the target audience by identifying who they are, their problems, and what solution you can offer to help them.
Understanding your audience will make it easier to convert leads into customers. You need to know how to speak their language (and we don’t mean it literally). That’s when artificial intelligence (AI) becomes a valuable marketing tool to explore in the content marketing industry.
These types of tools will help enhance your content in a way that resonates with potential customers. They analyse the text and then suggest the best keywords that will help you connect with the readers. This tool also makes recommendations based on the distribution marketing channels being used.
It understands how the language will correlate with customer behaviour. And by including these terms and phrases organically, you get to promote the action, which leads to conversions.
Combining the right tools with high-quality, useful, and relevant content will help drive traffic and more conversions. And unlike pay-per-click ads, you’ll only have to pay for the content creation once. It will continue to ensure lead generation for as long as your content is live.
How To Reduce The Cost Per Lead (CPL)?
CPL and ROI are interrelated in Google Ads. So, if you wish to boost the ROI of your marketing campaign, focus on reducing the cost per lead. Here are a few ways this can be done:
1. Focus On Inbound Marketing
Marketers prefer the conversion to occur as close to the bottom of the marketing funnel so that they don’t have to spend much effort in moving it up. But inbound marketing offers a variety of content at different stages. This increases the chances of conversion, as the content prompt leads to make the purchase.
2. Improve Quality And Relevance Of The Ads
Optimise your landing page to get as much value from it as possible. Leads should be able to understand what you offer within seconds. For this, relevant content is key.
Focus on choosing highly targeted long-tail keywords that reflect what prospective customers search for. Also, keep in mind that single keyword ad groups target a specific keyword per ad group to help you gain high performing ads more easily.
This marketing strategy will increase the quality score, ratings, and relevance and lower the cost per click. In short, if you’re spending less on traffic that is interested in your content, the CPL will be low.
3. Target Audience Based On Their Behaviour
Google allows you to target people who might be interested in the product or service offered by your company. Additionally, you can retarget leads who may have already visited your website so that they convert.
For this, you’ll need to group audiences into different categories based on their behaviour, such as:
- Those who visit high-intent pages, be it a pricing or landing page at the bottom of the funnel
- Those who visit negative intent pages, such as an un-subscription page
- Those who visit the high traffic pages, such as blog pages and the website homepage
Your marketing strategy should be to attract high-intent visitors as they are more likely to convert. That said, it’s also important to pay attention to the audience that’s already converted by serving them paid ads.
These strategies will prevent you from wasting money on audiences who wouldn’t be willing to convert anyways.
4. Don’t Waste Money And Effort On Low-Performing Keywords
Make sure you go through the list of keywords you are already paying for and analyse their performance. Optimise the terms and phrases that have helped in conversions and remove the underperforming ones.
There’s no point in paying for a highly searched keyword if it doesn’t help convert leads frequently. It’s better to switch to targeted long-tail keywords instead. Although you might get a few clicks, those who do click will convert at a higher rate.
5. Optimise Ad Performance By Performing A/B Tests
It’s always recommended to have at least two ads running simultaneously to perform A/B testing. If you only run one paid ad campaign, you won’t be able to compare, analyse, and optimise based on the results.
Keep in mind that the ad that converts more easily and reduces CPL is the clear winner. There’s no point in running an ad that gets clicks but doesn’t prompt the action of conversion.
Formulas For Calculating Google Ads
Measuring ROI and CPL will help you optimise your Google Ads or social media marketing campaigns and allocate resources accordingly. It may seem challenging at first, but you’ll get the hang of it after going through the formulas and examples we’ve put together for you.
Keep track of the data derived from the calculations by looking at it cohesively and synergistically. This will help you predict the revenue you might gain from sales and identify where to invest.
That’s all the time we had today. We’ll leave you with a pro tip: always work out the customer lifetime value (CLV) to figure out the budget needed for ad spend. This will help your company grow with minimal risk.
Please leave your thoughts on the topic in the comment section below.
Allan is the head of SEO strategy and implementation at sitecentre, in charge of planning and allocating on-page, off-page and technical changes. Allan has more than 10 years in the Search Engine Optimisation industry in addition to online marketing and system optimisations.