Kyle Sulerud - October 24, 2019Here’s the truth: ROI is not necessarily something that you want to increase. Once I explain the formula, hopefully you’d understand why the goal doesn’t have to be increasing ROI.
In this article, I’ll talk about how to calculate ROI and what you can do to increase it.
Let’s talk about the formula:
Situation 1:
I spend $10.00 on ads to make $100.00 back. That gives us a gain of $90.00 which means 900% ROI of our initial $10.00 investment.
Situation 2:
I spend $100.00 on ads to make $300.00 back. That gives us a gain of $200.00 which means 200% ROI of our initial $100.00 investment.
Both examples are great, but which would you rather have?
Would you prefer 900% ROI that’s worth only $90.00? I would rather have the lower ROI of 200% that is worth $200.00.
That is why “how do I increase ROI?” may not always be the best question to ask. You can have a fantastic ROI, but it could mean that you are being too restrictive in your investment, and there’s not a lot of opportunity to make profit. Whereas if you’re willing to invest more (at perhaps a smaller ROI), there could be bigger profit potential.
So that’s my take on ROI. It’s not necessarily the right metric to chase. I prefer to chase profit. I can put profit in my pocket, but I can’t put ROI in my pocket. Profit is tangible, ROI% is not.
With that in mind, let’s talk about what you can do to increase ROI.
1) Decrease the amount you’re investing.
Look for areas inside your Google Ads account where you can spend less. Exclude certain keywords, audiences, locations,, demographics where you’re not gaining much ROI. You can also opt to just lessen the amount of your bids on these variables, instead of entirely excluding them.
By default, comparatively, we are spending more on things with a high ROI. So that’s going to give us an overall increase in our ROI. We can also just bid less overall, which is going to affect our average ad position and our traffic.
We’re going to get less traffic, but we’ll be paying less per click. Essentially, we’re spending less in the hopes that the amount we’re making does not decrease as you decrease your ad spend.
Let’s say I’m currently spending $100.00 on ads to make $300.00 back. If I drop that all the way to spending $10.00 just focusing on the traffic that’s giving me the best ROI, perhaps now I’m making $100.00 from that traffic, which is a higher ROI, but lower “actual profit”.
In a perfect world, we would want to spend less on ads (hoping to just cut out the amount of traffic that doesn’t become a customer) but still retain the amount of gain. But most of the time, it doesn’t happen.
If you’re going to be spending less, the goal is to not really take away from any potential sales. We only want to cut out non-customer traffic.
2) Increase the amount you’re making.
So you already have this traffic coming from Google Ads. Can you make more from this same traffic? Yes, there are usually many ways to do that.
Look at this from the perspective of a company that’s generating leads. You would apply this in a similar way if you were doing direct online sales.
The first thing to do is to increase lead conversion rate. More people coming to the website should become leads (calling your office, filling out contact forms, etc.) You can do this by adding relevant information and making improvements to the website such as the layout of the landing page, the offer, etc.
Speaking of sales, there are lots of ways to improve your closing rate. Not all salespeople and sales processes are created equal. There are many ways to increase the sales that you’re getting from your leads depending on how those leads are being handled, what types of things you’re offering, who is talking to them, etc. If you increase your closing rate, you will increase the amount you make, and therefore increase your ROI.
You could also increase your average order size. You can also offer another service that can come with the product you’re selling now, so you can add more to the amount that you’re charging your customer. You can increase your average order size, which could then turn into an increase in ROI.
You could also increase the lifetime value of a customer. If you’re a company that typically just does one transaction with a customer, perhaps there’s a way for you to start doing more transactions with the customer. Offer new things that you can do for them–perhaps a monthly maintenance plan, or another way where they can make use of your services again. This will increase your ROI in the long run.
What’s the Bottom Line?
Profit is far more important than ROI. And the good news is, most of what I’ve talked about here will also increase your profit. Increasing your conversion rate, closing rate, average order size, and lifetime customer value are all going to improve both ROI and profit–meaning good results for your business.