In order to understand the return from PPC ad campaigns, you need to turn know:
Value of a conversion
Number of clicks
Average cost per click
Knowing these four variables allows you to calculate the ROI of the ad campaign as a percentage of the overall ad campaign spend.
For our example, let's assume you spend $1 per click, and that a conversion is worth $45. You convert at 3%, and obtain 1000 clicks over a given period. Your calculation is then:
PPC ROI = ((Total revenue - Total cost) / Total cost) x 100
= (((Value of a conversion x Conversion rate x Number of clicks) - (Average cost per click x Number of clicks)) / Total cost) x 100
= (((45 x 0.03 x 1000) - (1 x 1000))/ (1 x 1000)) x 100
= (1350 - 1000)/1000 x 100
= $350 or 35%
It's worth bearing in mind that the $45 used in this calculation is the profit on the product or service sold. Not the list price. There are usually other costs involved in fulfilling an order, so we can only use the profit from the conversion in this calculation.