How does campaign tracking work?

Google Analytics accurately tracks visitors from a source, such as a search engine or email link, to a conversion or transaction on your site.
How does it work?
Google Analytics tracks data from a variety of sources to provide closed-loop ROI analysis. Let's look at the steps.
Step 1: From Link to Web Page
Each visitor to your site enters via a link indicating where they clicked from, the keywords they used, if any, as well as campaign and medium information. Google Analytics parses the link to obtain this information.
The information is gathered by the tracking code installed on each of your web pages. You can add the code manually into each web page, or automatically using server side includes and other template systems. Once installed, the tracking code is triggered each time a visitor views the page. Analytics tracking code performs three tasks:

• it ensures that a page hit is registered even if the page was cached or proxied,
• it parses the link to gather your campaign information, and
• it updates visitor activity information.

Step 2: Parsing the Link
The Analytics tracking code parses the incoming link to obtain the campaign information that you have specified. For example,

http://www.example.com/?utm_source=google&utm_medium=cost-per-click

indicates that the visitor clicked on a cost-per-click link on the Google search engine. The tracking code also automatically detects the keywords that the visitor searched on. Although this particular link uses only two variables, utm_source and utm_medium, which indicate the source (Google) and the medium ("cost-per-click"), your links may incorporate up to three additional variables:utm_campaign, utm_content, and utm_term. These three variables are available to indicate a specific marketing initiative, ad content, and a paid search term, respectively. Information on these variables and how to tag your paid links is provided in the article How do I tag my links?
The tracking code is not limited to parsing links that you embed in emails or paid keywords, but also parses keyword information from organic links. This is important because it helps you to make side-by-side comparisons of paid versus unpaid search results. Google Analytics recognizes links from the top search engines and pulls out the source and keyword information. In addition, your tracking code can also be configured to recognize and parse links from custom organic search engines, if required.
Step 3: Logging Campaign Information and User Activity
Google Analytics reads the client's first-party cookie, updating user tracking information as required. For example, if this is the user's first visit to your site, the tracking code will add the campaign tracking information to the cookie. If the user previously found and visited your site, the tracking code increments the session counter in the cookie. Regardless of how many sessions or how much time has passed, Google Analytics "remembers" the original referral. This gives Analytics true multi-session tracking capability.
Step 4: Adding Goal Data
Once a page in your web site has been defined as a conversion goal, Google Analytics will be able to calculate metrics indicating how successful your site is at converting visitors. By comparing referrals, sessions, and visitor activity to conversions, Analytics can report on the effectiveness of your keywords, mediums, campaigns, and content. The system can also report latency metrics such as time to goal and sessions to goal. To learn how to define a conversion goal, read How do I set up goals?