ROI and other Dangerous Metrics

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Recently, I answered this question on Quora: “If the cost of PPC is £10, what is the ROI?”

A simple question, right?  But assessing ROI for PPC campaigns has hidden dangers, so I used the opportunity to not just answer the ROI definition question, but to point out some common misconceptions in optimizing to a pure ROI metric.  Here’s how that went:

ROI (Return on Investment) has a specific definition, but is often used fairly loosely to mean the profitability of a company or program.

Technically,

ROI = (Revenues – Costs) / Costs

So, If you made £20 from your £10 investment in PPC, your ROI would be:

(20 – 10) / 10 = 1, or 100% ROI

This differs a bit from Return On Ad Spend (ROAS) which is a commonly used metric:

ROAS = Revenues / Ad Spend

For the same example: ROAS = 20/10 = 2

ROI is usually expressed as a percentage, and ROAS as a number. Note that an ROAS under 1 is unprofitable, while any positive ROI number indicates profitability.

Now, since you asked about PPC specifically, let me point out the DANGER in both of these calculations. So here is a question:

“Which is better, 100% ROI or 200% ROI? What about an ROAS of 2 or an ROAS of 4?”

Like most people, you are probably going to say “Well, Soren, that’s a dumb question, of course the higher number is better in both cases”.

And you would be right, as long as the cost number is equal in both cases.

The big danger with ROAS and ROI is that they are often used to compare situations that are not apples-to-apples with regard to cost. Volume is completely missing in these equations.

In PPC, optimizing to ROI as a percentage can put you out of business. Don’t believe me?

Here’s another question. “Do you want profit of $1,000,000.00 at 100% ROI or profit of $100.00 at 400% ROI?” No brainer. I want the $1M profit regardless of ROI.

The real goal is the total amount of profit, not ROI.

Unfortunately, this important point is lost on many CEOs, CMOs, and, surprisingly, CFOs when speaking to their marketing teams or partners. ROI can be a good measure of efficiency when used appropriately, but it is not the goal.