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Ad Spend ($): This is the total money you spent on an ad campaign. Note: this should exclude recoverable taxes. What are recoverable taxes? These are taxes that are recoverable or available as a credit or eligible for a refund. For example, in the US, sales tax paid on business expenses is not recoverable. So, the ad spend should include sales tax. But in countries like Canada and Australia, HST/GST paid on business expenses is recoverable, so the ad spend should not include VAT/GST. Logic? Well, since the HST/GST is recoverable, it can’t be counted as an expense.
If your business is based in the US and the ad spend is $1000 inclusive of sales tax of $200, take this $1000 as input for the ad spend.
If your business is based in Canada or Australia and the ad spend is $1200 inclusive of HST/GST of $200, take $1000 as input for the ad spend.
Sales from Ad ($): This is the value of the sales you made because of the ad campaign you ran. Note: this should always be exclusive of taxes you collect from your customers. Why? Because the taxes you collect from your customers are not your revenue. It’s just tax money you’re passing through to the government.
Makes sense?
For example, if your sales from ad value is $5500 including tax (sales tax/HST/GST) of $500 collected from customers, the sales from ad value to be taken as input should be $5000.
Net Profit Margin (%): This is the net profit (expressed as a percentage of sales) left after deducting all costs, like service costs, commissions, operation costs, fuel, OTA, loyalty redemptions, etc. And yes, also ad costs.
How do you get this? Simply pull this number from last month's or last year’s P&L account.
Note that this net profit margin% (that you pulled from the P&L account) is measured at the business level and not at the product level. Now, what if the product’s (for which you ran the ad campaign) net profit margin is higher or lower than your business average net profit margin? Here, estimate your product’s net profit margin independently after considering all costs attributable to the product and then input the same in the calculator.
ROI (Return on Investment): This is the return (net profit) on the ad campaign, expressed as a percentage of ad spend. So, if the ROI is 125% that means you spent $100 on ads and got $125 as net profit. Or, you spent $1 on ads and got $1.25 as net profit.
Needless to say, an ROI over 100% means your ad campaign is financially profitable.
Travel companies, agents, and platforms regularly run online ads to boost sales. But ads can easily eat into the bottom line if you don’t measure ROI carefully. We should discontinue ads that don’t provide a good return on investment, right?
But how do you calculate the ROI? Let’s find out.
ROI = (Return / Investment) x 100
Now, let’s break down the return and investment variables.
ROI = [(Sales from Ad x Net Profit Margin%) / Ad Spend] x 100
ROI = [(5000 x 25%) / $1000] x 100 = 125%