# About return on investment (ROI)

Whether you use AdWords to increase sales, generate leads, or drive other valuable customer activity, it's a good idea to measure your return on investment (ROI). Knowing your ROI helps you evaluate whether the money you're spending on AdWords advertising is going to a good cause: healthy profits for your business.

## How ROI Works

One way to define ROI is:

(Revenue - Cost of goods sold) / Cost of goods sold

Let's say you have a product that costs \$100 to produce, and sells for \$200. You sell 6 of these products as a result of advertising them on AdWords, so your total cost is \$600 and your total sales is \$1200. Let's say your AdWords costs are \$200, for a total cost of \$800. Your ROI is:

(\$1200 - \$800) / \$800

= \$400 / \$800

= 50%

In this example, you're earning a 50% return on investment. For every \$1 you spend, you get \$1.50 back.

For physical products, the cost of goods sold is equal to the manufacturing cost of all the items you sold plus your advertising costs, and your revenue is how much you made from selling those products. The amount you spend for each sale is known as cost per conversion.

## Why ROI matters

By calculating your ROI, you can find out how much money you've made by advertising with AdWords. You can also use ROI to help you decide how to spend your budget. For example, if you find that a certain campaign is generating a higher ROI than others, you can apply more of your budget to the successful campaign and less money to campaigns that aren't performing well. You can also use ROI data to try improve the performance of the less successful campaigns.

## Use conversions to measure ROI

To identify your ROI, you first need to measure conversions, which are customer actions that you believe are valuable, such as purchases, signups, web page visits, or leads. In AdWords, you can use the free conversion tracking tool to help track how many clicks lead to conversions. Conversion tracking can also help you determine the profitability of a keyword or ad, and track conversion rates and costs-per-conversion.