We’ve written about using data to automatically show your better performing ads more often and using Urchin to make data driven decisions about your site itself. Now, for a little bit about metrics that can show which of your keywords are actually driving sales:

Although clickthrough rate (CTR) is a great measure of the relevancy of your keywords (a keyword with a high CTR indicates that users searching for that word are interested enough in your ad to want to visit your site), it doesn’t tell you what happens after the user gets to your site. That's where tracking your conversions comes in. Using Google's free conversion tracking, you can see which clicks lead to purchases and thus more intelligently decide which of your keywords are worth investing in. So how does it work?

After placing a snippet of code on your site’s confirmation page (usually the “Thank you for your order” page that users see after they purchase something), when a user clicks on your ad, a cookie is placed on their computer. If, when they visit your site, they end up on this confirmation page, the cookie is recognized and a conversion is reported. In your account, you’ll be able to view conversion data all the way down to the keyword level or run custom reports to view additional conversion statistics.

With the more advanced conversion tracking, you can not only learn which keywords are generating sales but also understand the revenue generated by each of your keywords. If you're spending more on clicks for the word “granny smith apples” than you are selling as a result of that spend, you’ll want to consider refining that keyword or adjusting your maximum CPC accordingly. Similarly, if you find that “mail order apples” is bringing in more revenue than it’s costing you in clicks, you might want to consider expanding your keyword list with similar words (“mail order fujis,” “mail order granny smiths”) or possibly increasing your bid on that keyword. By spending less on poorly converting keywords and increasing your spend on high conversion ones, you’ll optimize your overall ROI.

And if this all sounds a bit complicated, check out the conversion tracking setup guide (.pdf) or ask your webmaster to help you add the snippet of code to your site to get you started.