ROI and Conversion Tracking

ROI is the ratio of your net profit to your costs. It's based on your specific advertising goals and shows the real effect your advertising efforts have on your business. 

One way to define ROI is:

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

If you need an example of using this formula here is a link.
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. 
If you are interested in how you can maximize your impact for the amount you spend, study taking three steps:

1. Know your goals. 

Before anything else, understand your advertising goals -- what you want to achieve using AdWords, and what the best ways are for you to measure your success.
2. Understand the relationship between cost and quality.
All things being equal, the higher a keyword's Quality Score, the lower the price you pay for each click (called your actual cost-per-click) and the better its ad position.

Improved Quality Scores can impact your spend in several ways:

• High-quality keywords generally cost less for each click.
• High-quality ads can show in a better position without costing more.
• More clicks can fit within your set budget, allowing your ad to show more frequently.

You can improve your Quality Score by optimizing your campaign and, subsequently, by enhancing factors like click-through rate (CTR) and landing-page experience.

3. Track your ROI

The bottom line for any ad or keyword is how much value it generates compared to its cost. To determine the profitability of a keyword, you can track the conversions  from that keyword using one of these free tools in your account:

 Conversion Tracking: You can use conversion tracking to determine the profitability of a keyword or ad. Easily track your conversion rates and cost-per-conversions. 

 Google Analytics: You can use Google Analytics for a more advanced ROI analysis. In addition to basic conversion tracking, Analytics also offers advanced conversion reports and conversion funnel analysis. Once you have conversion data, you can identify unprofitable ads and keywords to optimize or remove.

An AdWords conversion occurs when someone clicks on your ad and performs a behavior on your website that you recognize as valuable, such as calling your business from a mobile phone or making a purchase on your website. 

Once you've set up conversion tracking, you can keep an eye on some important statistics to help you measure whether your ad campaign is successful:

• Number of conversions and cost-per-conversion: You can assign monetary values to your conversions when setting up tracking to get detailed revenue information in your reports. Reviewing your total number of conversions and the value of these conversions can help you decide if you should increase your budget or make changes to your ad groups to attract more targeted visitors.
• Conversion rate: This helps you track how many clicks lead to valuable actions like a sale or signup. The conversion rate listed in your account is the number of conversions divided by the number of ad clicks. Conversions are only counted on Google and our Google Network partners. The conversion rate is adjusted to reflect only the ad clicks on which we can track conversions.
• Keyword conversion data: conversion tracking shows you what happens after a customer clicks on your ad -- whether he purchased your product or signed up for your newsletter. By knowing this, you'll also know which keywords are best at encouraging customers to take those actions. Then you can improve your keyword list based on your findings, and make smarter investments in your best keywords.
• See how customers interact with your ads across devices: Sometimes your customers click on your ad on one device, and then make their purchase on another device. These are called cross-device conversions, and you can see them in the All conversions column in your AdWords account.
• Landing pages: You can see which landing pages
   are leading to the most conversions on the Dimensions tab of your account. Just click the View button, then select "Landing page" from the drop-down, and make sure you've added the conversion columns to your data table.
• Depending on the type of conversion you’re tracking, the setup process is different, so the first step in setting up conversion tracking is choosing a conversion source, or where your conversions come from. Read how to choose a conversion source