What is ROAS? Effective Use of ROAS Bid Strategy to Maximize Return on Ad Spend in 2021

Choosing the right bidding strategy can really elevate your PPC campaigns. When you align your PPC goals with the perfect bidding strategy, you soon experience a greater number of auction wins and overall stronger conversions.

However, it isn’t just a matter of selecting the right bidding strategy and pressing go. You still need to pay close attention to how your bids are performing. They are taking part in thousands of auctions at any given moment. Thus, managing bids can be a painstaking part of your campaign management.

Luckily, Google Ads has introduced Smart Bidding strategies, which lessens this burden placed on PPC managers, while still tapping into the powerful benefits that come with having a great bidding strategy.

What Is Smart Bidding?

Smart Bidding is an automated bid strategy that relies upon the power of machine learning. With this sophisticated learning engine, Smart Bidding is able to automate your bids for every auction, which bolsters the number of conversions and conversion value in each auction.

This is known as “auction-time bidding.”

Smart Bidding is able to make these fast decisions by leveraging data from past PPC campaigns. Thus, while Smart Bidding is a viable option for small and large businesses, you need some level of PPC history to use this feature properly. Otherwise, the bidding decisions it makes may lack the accuracy that you need in your campaigns.

Smart Bidding includes a number of strategies, such as Target ROAS, Maximize Conversions, ECPC and Target CPA.

For this discussion, we will be focusing on the Target ROAS bidding strategy.

What Is ROAS and How Does Target ROAS Work?

ROAS stands for ‘return on ad spend.’ Essentially, it is how much value you receive through conversions for every dollar spent on PPC ads.

So, ROI?

Not quite. ROI is focused on calculating profits, which means we not only have to factor in ad spend but also the cost of the goods being sold and operating costs.

How to Calculate ROAS: A Simple Formula for Return on Ad Spend

ROAS is a much simpler equation:

Return on Ad Spend = Revenue ÷ Ad Spend × 100

If you spend $20 on PPC ads and return $50 in revenue, then your ROAS would be 250%.

As a bidding strategy, Target ROAS focuses on maximizing the value of each conversion, instead of the number of conversions — quality over quantity

Because this strategy is automated, machine learning does most of the work. You enter the maximum cost per click you’re willing to pay and the desired ROAS. Then, Smart Bidding works to get you as close to that number as possible with the bid you’ve supplied.

Your bids will fluctuate all the time because the Target ROAS strategy calculates the best amount to bid at the time of auction.

The drawback is that you cannot manually make your own bid adjustments, except in mobile ads.

ROAS Versus CPA

ROAS and CPA are two common performance indicators that advertisers use. They both provide an overview of your campaign’s health and performance, particularly with how they relate to cost.

Unfortunately, it can sometimes be difficult for novice PPC users to understand when to rely on each metric.

CPA focuses more on the average cost for each conversion. It’s a nice metric when looking at a large volume of conversions. You can see a baseline for the average cost that you’re paying for each individual action.

You can even reverse engineer CPA by looking at how much your typical customer spends and then deciding a target CPA for your bidding strategy that is less than that number, thereby creating room for profit.

Compared to ROAS, though, CPA falls short for one key reason: not all conversions are created equal.

To explain, you could spend $100 on two different ads, each one resulting in a conversion. This creates an identical CPA for both ad groups.

But, when we look under the hood of each conversion, we find that one lead spent $70, while the second spent $250. Immediately we know that the ad that produced $250 more in revenue was wildly more successful.

By injecting revenue into the equation, advertisers are able to better evaluate what happens after each conversion is made. This is why many PPC professionals feel that ROAS is superior to CPA.

CPA can even be misleading at times! If a PPC manager sees that a particular keyword has a higher-than-normal CPA, they may feel compelled to bid down, thereby spending less money on these terms.

However, without looking at the ROAS of that keyword, they neglect to realize that conversions from this keyword have a much higher value!

Measuring ROAS Isn’t Always Easy

On paper, every marketing metric seems easy to calculate. Yet, there are always a number of other factors that can throw off the exact number. For ROAS, there are two key influences that can affect its precise value: marketing attribution and customer lifetime value (CLV).

Marketing Attribution: Customers are engaging with your brand and products across many different touchpoints. Marketing attribution is the act of tracking a customer’s journey across these touchpoints with the intent of evaluating each step’s credit towards making that final sale.

In a perfect world, a customer would see your PPC ad, click it, convert and boom. Easy to measure return on your ad spend.

The reality is rarely so simple.

A more likely scenario is a customer sees your ad, clicks and doesn’t convert right away. Days later, a social media post reminds them of that great product they saw, they return to the site and then make their purchase.

Both the social media post and the PPC ad played a role in this conversion, but how do you decide which strategy to give the credit to?

Does the PPC ad take the credit for being the first through the door, or is the social media department responsible because they sealed the deal? Maybe credit should be split?

You need to decide on a single attribution model and run with it. This will help keep your ROAS calculations consistent.

Customer Lifetime Value: ROAS is also challenged by the lifetime value of each customer. Initially, your ad traffic may only spend $50, but next month they return for another purchase, and then another and another.

Soon, they’ve spent $600 in the year and it all came as a result of that first PPC ad!

When a new customer first converts it is impossible to know how much they’ll spend in a lifetime with your company. They may never return or become a loyal, long-term customer.

The best way to guess at the lifetime value of a new lead is to look at the average lifetime value of your past and current customers.

Does Target ROAS Have Limitations?

Absolutely!

Because we’re measuring our ROAS alongside other numbers, like the average lifetime value of our customers, there’s a fair amount of wiggle room between your calculated ROAS and your actual ROAS.

Before you start treating the Target ROAS bidding strategy as your PPC campaign’s gospel, ensure that your conversion tracking and attribution models are as accurate as possible.

For smaller businesses, this may take some time, as you need ample experience and historical data available.

What’s A Good ROAS?

This is a common question and perhaps the one that is hardest to answer. We all hate to hear this, but the answer is: It depends.

Every business is different and has its own operating margins and other expenses that will affect what a viable ROAS is.

For example, if your gross margins are very tight, then spending too much on ads is going to severely hamper your revenue. You can even lose revenue if you aren’t careful!

You may want to work with your accounting department when determining a viable ROAS for your bidding strategies, especially because this metric is so closely related to revenue.

How Do I Setup A Campaign With Target ROAS?

For Google Ads, it is very easy to change your bidding strategy to Target ROAS. Here’s a simple breakdown of the steps:

1. Access your Google Ads account
2. Select the campaign you want to optimize with Target ROAS bidding strategy
3. Click the ‘Settings’ tab within this campaign
4. Then, select ‘All Settings’
5. Scroll until you find ‘Bid Strategy’ and press ‘Edit’
6. ‘Change Bid Strategy’ will create a dropdown menu, where you can then select ‘Target ROAS’
7. Enter your desired ROAS (as a percentage)
8. Save your campaign!

It’s important to mention that Target ROAS will function differently depending on the campaign type and network.

For Search Network Only and Search Network with Display Select, the Smart Bidding feature will optimize for an average ROAS across all ad groups and keywords.

Display Network Only and Shopping Campaigns, on the other hand, will experience optimization for your targeted ROAS amount across all campaigns and ad groups.

Currently, you cannot use Target ROAS as a bidding strategy for mobile app campaigns on the Display Network.

Optimizing Target ROAS Campaigns

Any PPC campaign or bidding strategy, smart or otherwise, requires careful attention to details. Otherwise, it won’t run optimally and your potential returns will be minimized.

We’ve set our campaign, but it still needs to be optimized.

Review your margins: Some businesses may be lucky enough to find industry-specific benchmark data for how to set a Target ROAS objective.

That said, to protect yourself from setting the wrong ROAS percent for your campaign, it is important to review your own margins.

You’ll want to evaluate this figure for each campaign by taking a detailed look at the products and services you’re offering in those ads. What are the margins for those products/services and where does your ROAS need to be to leave ample room for profit?

Split campaigns into smaller ad groups: You want to segment your campaigns based on similar offerings. You also want to split hyper-successful campaigns into smaller ad groups. This will help you better target the reasons behind those winning ads.

Then, you can use those insights to better target audiences and receive even better returns.

As you’re performing this step, pay close attention to the volume of conversions and their returns. You’ll want to use data from past campaigns and bidding strategies to inform these decisions.

Allocate budget according to profit: Measuring ROAS is a great way to understand where and how to place your advertising budget.

Let’s say that your ROAS across Search Network campaigns is 3.64, which means you’re returning $3.64 for every dollar spent on the Search Network. But, Display ads are promoting a much stronger return at $4.50 per dollar spent.

This is a strong clue that you need to push more spend towards the Display Network. It’s all about moving pieces around and understanding what works and where the value is.

General Best Practices For Improving Target ROAS Campaigns

Campaigns utilizing the Target ROAS bidding strategy may have a different end goal in mind, but they still function like the rest of your pay per click advertising efforts. Thus, they benefit from many of the same best practices of PPC.

These are all general tips that any digital marketer or PPC advertiser can benefit from. And, they’ll also be positive influences on your Target ROAS efforts.

Become Mobile-friendly

Mobile devices (i.e. smartphones) have changed the way that consumers shop.

Your target audiences are using these tools at every step of the journey, whether it is to research products, compare prices, look for the best deals, find discounts or make a final purchase.

For Target ROAS campaigns, this means that many of those clicks and conversions are coming from mobile devices. If your ROAS is suffering, don’t immediately assume that the problem lies with bad keywords or poor campaign optimization.

It may be a matter of poor mobile optimization.

If your site doesn’t perform well on mobile devices, in terms of loading time and experience, there’s a better-than-high chance that these consumers will click away.

There’s a number of ways to improve your mobile experience:

• Remove clunky scripts or content assets that overload the page
• Use location-based services to help personalize the page based on location
• Use mobile-friendly design elements (“see more” buttons, for example)
• Remove unnecessary steps from the checkout process
• Ensure all the information displays correctly, whether in vertical or horizontal browsing

Many of these steps will also improve the load times for your mobile users.

Track Competing Strategies

In grade school, we’re taught not to copy our neighbors’ answers. In digital marketing, however, it is encouraged.

Studying your competitors and their strategies are vital to your own success. It allows you to see the other pieces on the board and how you can align your strategies to counteract their activities.

It’s also a great way to gain insights into your own campaigns. This is a must-use tactic for newer advertisers that may not have historical data to guide campaign-related decisions or concoct successful bidding strategies.

Using paid and unpaid tools, you can “spy” on the competition and how they are approaching their own PPC efforts. You can look at their ad copy, CTAs, and other assets. Some tools even let you see which keywords competitors are targeting!

Tools that let you see long-term trends are especially powerful, as these allow you to make data-driven guesses at which competing ads are the most successful.

If a competitor has been running an ad for a long period of time, you can assume that it is providing them with good returns.

There are two ways you can approach your competitors’ PPC strategies:

1. Use their efforts as inspiration for your own: This is why we say analyzing the competition is a must-use for new businesses. Not only do you lack the historical data for accurate decision making, but you may not have a great understanding of how to attract and entice your target audience. Adopting some of their strategies as your own is a good, short-term fix.
2. Find alternate ad opportunities: The more you understand about your competitors, the clearer your vision of the PPC sandbox your company is competing in. By knowing where your competitors are focusing their efforts, you can potentially find ways to counter-strategize. This may mean targeting less competitive keywords, highlighting different product benefits or addressing an undervalued point of contention amongst target consumers.

Perfect Landing Page Experiences

A big area of concern for campaign managers is when your campaigns are attracting clicks, but failing to convert. You’re spending money on those clicks, but aren’t seeing the returns. This is a glaring sign that your landing pages are lacking.

Many novice PPC managers make the mistake of using the same landing pages across all of their campaigns. This is a pitfall because each campaign targets a unique audience and highlights different products, deals, etc.

Just because your landing page was successful in a past campaign, or with one audience segment, doesn’t mean it will work universally.

If you’ve included an offer in the ad, make sure it is present on the landing page. That offer is likely the entire reason they’ve clicked in the first place! You also want to use the same type of style, tone and messaging between your landing page and ad.

If your ad and landing page don’t look, feel and sound alike, it is going to create an experience that feels disjointed.

Expert advertisers tirelessly test their landing pages and make small adjustments over time to ensure that they are optimizing results.

Keywords!

We can’t talk about PPC without including a lengthy section about keywords. It is these keywords that are largely going to dictate the overall success of any campaign.

For Target ROAS campaigns, keywords are just as important. Keywords lead to conversions and conversions directly impact how much we’re spending and what we’re getting in return.

There’s a lot to pay attention to as you evaluate your keywords.

Purchase Intent: Keywords that directly relate to your campaign’s desired action, whether it be a purchase, reservation, subscription or otherwise, should always be high-value targets. These keywords suggest potential leads that are ready to convert. For example, “buy khaki pants,” “free shipping on TVs” “sports store near me.” All of these searches suggest someone that is looking for an immediate solution.

Keywords with high spend and no conversions: This is a clear-as-day sign that something is wrong with your campaign. These keywords may lack the buying intent behind them as other terms in the same campaign. Or, it could suggest that there is a disconnect between these keywords and the resulting landing pages.

If you can’t find a solution, you may want to add these words to your ‘negative keywords’ list. This will ensure that your ads aren’t displayed when users search for these terms. Thus, the Smart Bidding technology won’t continue wasting valuable budget on terms that don’t convert.

Relevance: You want the people clicking your ads to be genuinely interested in converting. When irrelevant keywords find their way into your campaigns, it can not only cost you money on bad clicks, but it can also hurt your Quality Score and future ad rank.

You also want to pay attention to where your ads are targeting, especially if you are a brick-and-mortar store or an eCommerce business that only ships to certain areas.

Conclusions

Target ROAS is an undervalued bidding strategy. Many advertisers look at it as a metric reserved for e-commerce businesses. Yet, it actually provides a valuable, big-picture look at campaign performance.

With the Target ROAS bidding strategy, we can get right to the dollars and cents of our campaigns and see which tactics are successful and how that success translates into revenue!

In this respect, ROAS is truly an invaluable metric to look at. When marketers become too focused solely on things like cost per action and conversion rates, they miss out on understanding the true value in their PPC campaigns and individual ads.

And, because the Target ROAS option is a Smart Bidding strategy, you can spend less time adjusting bids and more time focusing on optimizing your campaigns for even better returns!