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We can define return on ad spend (ROAS) as total revenue generated through advertising divided by advertising’s total cost. You can express it in a few different formats, including:
ROAS is a proven metric that measures how much revenue your company earns for every dollar spent on marketing or advertising. Therefore, if your ROAS is 4:1, this means you’re making $4 in revenue for every dollar spent on advertising. In other words, if you generate $400 in sales from $100 of ad spend, that’d yield a ROAS of 4X. It can also be expressed in percentage (i.e., 400% in this example).
In this article, we’ll look at the importance of ROAS calculation and how it can help improve your pay-per-click (PPC) campaigns.
The success of your marketing efforts can be determined via a few key metrics such as return on investment (ROI), clickthrough rate (CTR), response rates, conversions, and cost per acquisition (CPA). ROAS is another critical metric that helps you evaluate the performance of an individual campaign. It can give you a good idea of which of your campaigns is performing the best, especially when you’re working with several other campaigns.
For example, if you’re running ten different campaigns for your company, it is more challenging to manage. You may find it tough to determine the campaigns that are worth pursuing. The ROAS metric will give you the insight needed to make the right choice.
If all of your campaigns have a budget of $2,000 but one of them has a much higher ROAS metric, then you might want to adjust your spend. Why spend $2,000 to return $4,000 when you might have a campaign that will return $10,000 with the same spend?
For ROAS calculation, you must know the potential value of the campaign’s target conversions. If you’re an eCommerce brand, the value will be equal to the cost of the product or service you are advertising.
If your campaigns concentrate more on lead generation, you should specify an average value to that lead. How do you calculate that value? Consider the average ticket you sell to leads that enter the web. If you sell a service valued at $100, calculate the percentage of leads that end up purchasing from you. Suppose it’s 10%, so the value you’d assign to each lead captured would be $10.
The ROAS metric doesn’t always show the cost-effectiveness of your campaigns. No brand can afford to give away its products or services for free, right? Therefore, the ROAS calculation often isn’t adequate to evaluate if you made any money.
For instance, a brand can have a high ROAS, but the real calculations may show that their campaigns didn’t yield many outcomes. That’s where the break-even ROAS calculation comes in handy. But for that, you first need to know your profit margin.
Let’s take an example to understand better. Suppose a brand sells smartphones for $1,000. If the smartphones’ actual price is $600, the remaining $400 is your profit margin.
Simple calculations show that the profit margin is 40%. Now you can calculate the break-even ROAS:
Break-even ROAS = 1 / Profit Margin * 100%
Break-even ROAS = 1 / 40% = 250%
This means the brand has to make $2.5 for each dollar spent on advertising to remain profitable. Otherwise, it’ll waste money. Bear in mind that such calculations don’t consider other business expenses like rent or taxes.
The break-even ROAS is essentially the minimum ROAS that you should get. But how do you know what ROAS value to target? Well, there’s no formula that you can use to determine the ROAS that will maximize your profits.
You may aim to achieve a 500% ROAS, but it is not always true. Moreover, every organization’s ideal ROAS varies depending on their industry, products, and competition. Keeping this in mind, you’ll have to do some testing to reach a ROAS value that maximizes your profits.
Many eCommerce entrepreneurs believe that the higher your ROAS, the better. This is not always true. Always remember, ROAS has a trade-off with volume. It’s also impractical to score an extremely high ROAS and get high conversions or sales volume simultaneously. The secret to getting a high ROAS lies in keeping your expenses relatively low compared to the profit you generate.
There are a lot of things that you can do to keep your costs low. Yet, the simplest way of doing so is to keep your cost per click (CPC) bids low. But keep in mind that this will bring about another issue.
When you lower your bids, Google will start displaying your ads less frequently, and you’ll observe your competitors’ ads showing up more frequently and in higher positions than your ads. This results in missed opportunities in terms of impressions, clicks, and conversions – all of which eventually lead to meagre sales and poor revenue.
On the other hand, if you’re trying to maximize the impressions, conversions, and sales you get from your Google Ads, consider bidding high. It would help if you also were willing to spend more on every click. However, when you bid high, your ad spend will increase, and your ROAS will decrease.
So, which combo should you choose: high costs and more sales or low costs and fewer sales? Well, you’ll have to determine which option maximizes your profit. For this, do testing and shuffle your targets month after month.
Suppose your break-even ROAS is 300%, and you’re currently targeting to achieve 500% ROAS. After running your PPC campaigns for a couple of months, you achieve this target quickly. Now, you calculate the actual profitability of your campaign using this formula:
Profitability = Revenue – Ad Spend – Cost of Goods Sold (COGS)
Next, you strive to achieve a different ROAS. You can either target a higher ROAS (600%) or a lower ROAS (400%). Your decision will depend on a few factors, such as your impression share (IS) and break-even ROAS.
IS is the number of impressions you’ve obtained divided by the estimated number of impressions you were eligible to get. If your IS value is relatively low, then you may want to try higher CPC bids. To allow your CPC bids to increase, you should let your ROAS to decrease. So, if your IS is low, then you may want to test out a lower ROAS target.
Another factor that will influence your decision is your existing ROAS vs. your break-even ROAS. Suppose your existing ROAS is only 60% above your break-even ROAS, then it isn’t feasible to lower your ROAS target by 120%.
On the flip side, if your existing ROAS is 10x your break-even ROAS, you get a lot more room to experiment. You can play around with a lower target ROAS without worrying about not getting any profit.
There is a type of automatic bid (called smart bidding bid) based on your target ROAS within Google Ads. You have to set what ROAS you want to obtain in a campaign, and Google will automatically adjust the CPC bids to achieve that target ROAS. But you must have a history with a minimum of conversions so that Google can automatically optimize the bids.
To determine the minimum ROAS value your campaigns require, you should put the benefit back on the table you get from each item you sell and the maximum CPC to afford to continue getting benefits by selling that item. After determining that maximum conversion cost, you can calculate the minimum ROAS with which to obtain benefits.
Many factors impact your ROAS calculation. These include:
With targeting, your ads can reach the most qualified audience. However, if you don’t perform it properly, you can end up wasting your ad budget. Targeting the wrong audience means interested customers won’t see your ads. While you may be developing ads for your target users, you’ll be showing them to another, less interested audience.
For correct targeting, make sure that you choose and bid on keywords relevant to your audience. Also, focus on whether you want to target short-tail keywords or long-tail keywords.
Targeting short-tail keywords will cost you more as you’ll be focusing on a wide range of customers. Whereas, you’ll typically spend much less on targeting long-tail keywords.
Here’s a breakdown of each keyword type:
These keywords cost more, and you’ll hardly generate a sale from ads targeting these keywords. The reason behind their higher cost is that many businesses want to make sales from these broad keywords. It’s challenging to generate a sale as customers looking for these keywords are perhaps not ready to buy from you yet.
These keywords cost less, and you have more chances of making sales from ads targeting these keywords. Only a limited number of businesses offer the super-specific product or service you’re targeting, making these keywords less expensive. Plus, it’s convenient to generate a sale as customers looking for these keywords are perhaps ready to buy when they find what they’re seeking.
Let’s try PPCexpo Keyword Planner for better keyword research for your campaigns.
Neither an extremely high nor too low CPC will work well for your ROAS. That’s because if your CPC is very low, your ads may not reach your target audience as you may not win the bidding auction for that particular keyword. Likewise, if it’s extremely high, your ads may reach the right audience (depending on correct targeting), but you waste your ad budget.
The best way to get a positive ROAS and an optimum CPC is to partner with a full-service digital marketing agency that knows how to attain your ideal CPC and, in turn, helps you achieve your target ROAS.
Target ROAS in Google Ads allows you to bid based on a target return on ad spend. It’s a smart bidding strategy that helps you achieve more conversion value or profit at the target ROAS you specify. It automatically optimizes your bids at auction-time. This allows you to modify bids for every auction.
Target ROAS can be accessed as either a standard strategy for one campaign or a portfolio strategy across several campaigns. Google Ads projects prospective conversions and related values that are available via conversion tracking. It will then specify maximum CPC bids to maximize your conversion value while attaining an average ROAS equivalent to your target value.
Keep these tips in mind before setting a Target ROAS for your campaign:
Here’s how Google Ads uses Target ROAS with different campaign types:
You may observe that some conversions may yield a higher ROAS, and some may return a lower ROAS, but overall, Google Ads will try to keep your conversion value per cost equal to the target ROAS you specify. For instance, if you specify a target ROAS of 400%, Google Ads will automatically adjust your bids to try to maximize your conversion value while attaining this target ROAS.
To help enhance your performance in the ad auction, Target ROAS strategy adjusts bids using real-time signals such as device, browser, location, time of day, and more. It also automatically tweaks bids depending on whether or not a user is on one of your remarketing lists.
Google Ads will suggest a target ROAS value after you’ve specified a new bid strategy in the Shared library and selected the applicable campaigns. This recommendation is calculated depending on your actual ROAS over the past few weeks.
Google Ads will exclude performance from the past few days to account for conversions that may take more than a day to complete after an ad click. You can select whether to use this recommended target ROAS value or specify your own.
For instance, suppose you measure sales for your eCommerce store, and you want to optimize your bids depending on the value of a shopping cart total. Your goal — or conversion value — is $20 worth of sales for each $5 you spend on ads. You would specify a target ROAS of 400% – for every $5 you spend on ads. You’d like to receive four times that in revenue.
Here’s the math:
$20 in sales ÷ $5 in ad spend x 100% = 400% target ROAS
Now, Google Ads will automatically set your max. CPC bids to maximize your conversion value while striving to attain your target ROAS of 400%.
Setting bid limits for target ROAS is not suggested as it can limit Google Ads’ automatic bid optimization. It can also stop Google Ads from tweaking your bids to the amount that best meets your target ROAS. In case you specify bid limits, they’ll be used in Search Network auctions only.
Figure out your existing ROAS and incorporate the principles of conversion rate optimization. Once you’re done with this, you’ll be well on your way to increasing your brand’s ROAS for advertising and marketing campaigns in the future.
You can also run different reports via the PPCexpo Reporting Tool to evaluate your campaign performance. There are several areas that you can’t figure out via Google Ads’ simple reporting. By performing a complex and detailed analysis of your campaign data, you can successfully optimize your PPC campaign.
In simple words, an advertising metric like ROAS measures the efficiency of a paid ad campaign. It can be used to compare campaigns against one another to observe, which is the most profitable and successful campaign. This info can help you determine where to invest your ad budget to get the best ROI.
The biggest reason why ROAS is significant is that it helps you assess the performance of every campaign. When you are running several campaigns at a time, the ROAS value can help you identify the best performing campaign.
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