Google Ads: Understanding ROAS
“How much return am I getting on every dollar spent?” This is a question that many people ask themselves when they are evaluating Google Ads campaigns. ROAS, or return on advertising spend, is the ratio of return to the amount spent in advertising for individual ad campaigns, ad groups, and ads. In this blog post, we will discuss what ROAS means, how to calculate ROAS, and why it’s important to your business!
What is ROAS?
What is ROAS? We can think of return on ad spend as a marketing metric that measures how much money we are making for every dollar spent in Google Ads. What is ROAS? It’s similar to Return on Investment (ROI), but we don’t include the cost of goods sold in ROAS. We can calculate our return on ad spend by taking revenue and dividing it by total advertising costs, then multiplying that number by 100 to get a percentage, also known as the ROAS formula.
Why is ROAS important for advertisers?
ROAS is an important metric for advertisers because it allows us to measure our return on investment (ROI) and make changes accordingly. Understanding ROAS is important for advertisers because it can help us understand if our Google Ads campaigns are meeting our goals. Another reason ROAS is important is that it will allow us to determine target ROAS for future campaigns, and what we can do if our target ROAS is not being met.
The ROAS formula
To calculate return on ad spend, you will need to know the following:
– how much money your ad campaign makes in total (total conversion value)
– how much does your ad campaign cost for that conversion or sale (conversion cost)
The ROAS Formula = Total Conversion Value / Total Cost * 100% = % return on ad spend.
For example, if conversion costs $10 and each sale earns your business $100, you can use the ROAS formula and insert these numbers:
Total ROAS = 100 / 10 x 100 =1000%
What is a good ROAS?
According to the ROAS formula above, you will have a return on ad spend of 1000%, or 10x. This means that for every dollar you spend, you will earn 10 dollars in return. A return on ad spend this high is very unlikely. In most cases, businesses are more likely to see lower returns. It’s important to note that the average ROAS varies by industry, where some industries see a higher average ROAS compared to others. For example, the average ROAS for retail is typically lower than the ROAS for finance. If an advertising campaign or individual ads receive ROAS values above 100%, that means the return on ad spend is higher than your advertising costs.
In this case, a 10x ROAS is considered a high ROAS, so spending on advertising campaigns would be a good investment. If the ROAS for a given advertising campaign is below 100%, then it costs more to make that conversion than you are making from each sale. In this case, you should consider reducing or stopping your Google Ads campaign investments.
Alternatively, you can try to improve your website conversion rate by optimizing your website to make it more appealing for target customers. This way your target ROAS will likely go up and you can try to get more conversions at a better ROAS.
How to calculate if a given ROAS meets your advertising goals?
In order to calculate if a given ROAS level is helping your online advertising performance, you will need to first estimate how much you make on a product, by calculating this after the cost of goods sold. If you generated $1000 worth of revenue in a month and spent a total of $500 in costs associated with generating this revenue (both indirect and direct costs), you have a profit margin of 50%. This can be calculated with the following formula:
(Cost of Goods Sold / Revenue) x 100 = % profit margin
If you have a profit margin of 50%, it means that for every dollar you earn from a sale, you keep 50 cents. If you sell a product worth $10, you will earn $5. Following this, the cost per sale is $5.
Based on the above ROAS and ROI calculations, we can now estimate if a given ad spend ROAS is a low ROAS or a good ROAS for your objectives.
If you have a ROAS of 120%, this means that if you invest $100, you will earn $120 from your ads. In the above case of the $10 product, this means you sold 12 products on a $100 ad budget (We can find this by dividing the total revenue by the price of a product).
By using your profit margin, we can then see if this is a high ROAS or a low ROAS. If you sell 12 products at $10 per product, you make $120. You can then subtract your cost of goods sold based on your margin, which is 50%, or $60. This means that after investing $100 to run an ad campaign, you made $60, leaving you with a loss of $40. Based on this level of conversions and revenue per conversion, it’s clear by calculating this that the ad campaign hasn’t generated enough revenue to provide a sufficient ROAS.
In the above example, if the conversion value increases, without any change to the cost per sale, this helps increase your revenue without reducing your cost. This means your campaign may be profitable, assuming the cost per click, bid, and other Google Ads marketing metrics do not change. For example, if your average customer buys 2 products instead of just one, you will find that your account will be generating a positive ROI and that your advertising campaign is potentially a good strategy for your website.
On the other hand, a ROAS of more than 200% would make your Google campaigns worthwhile. We can calculate this as follows:
$100 invested in Google Ads with an Ad Spend ROAS of 200% gives a revenue of $200.
Deducting the Ad Spend of $100, you are left with $100 after paying for your Google Ads.
Of the $200 revenues made, we know that 50% of it is used to cover costs. This means that $100 was used to cover the costs of goods sold.
We can then calculate how much money your business made from this Google campaign:
Total revenue: $200
Cost of ads: $100
Gross profit: $200 – $100 = $100
Cost of goods sold: $100
Net profit: $100 – $100 = $0
Based on this, we understand that your advertising efforts need to make an Ad Spend ROAS of more than 200% in order to be profitable and in turn a good digital advertising strategy for your business.
Why is it important to understand ROAS?
Understanding the marketing metric ROAS helps marketers understand their Google performance by seeing how much revenue was generated from your ads campaigns as a result of sales from your website. This is essential for any eCommerce business looking to increase their website conversion rate and Google ads performance. When you calculate ROAS, it’s essential to look for ways to improve it, for example by increasing your website conversion rate or increasing the number of customers adding products to their shopping cart.
Setting a Target ROAS
Now let’s look at how to set a target ROAS.
Target ROAS is the target you want to hit for a campaign in Google Ads. Without setting a target, Google will attempt to get as many sales as possible within a given budget – which means there isn’t a specific revenue goal behind your ad campaigns! We need goals so we can optimize towards reaching your business target and generating a desirable return on investment (ROI). We need the target ROAS goal for each campaign or ad group because we want to make sure that there is a purpose behind each campaign and Google Ads spend, otherwise you might as well be throwing money away!
How to set a Target ROAS goal in Google Ads
You can set a target ROAS in your Google Ads campaigns by going into the Campaign Settings and selecting Maximize Conversion Value under “Bidding” in your settings. Here you need to tick the box that says “Set a Target Return on Ad Spend (Optional). You can now set your target ROAS by typing in a target percentage return that works with your ROI goals.
What Target ROAS should I set for my campaigns?
What target ROAS should you set for your campaign? There isn’t anyone specific target that fits all businesses – this target should be determined by your business goals and objectives. But what is a good target ROAS to set?
We recommend that you start with a target of 100% or more because this will give you room for optimization towards the target in Google Ads, which means having enough impressions and clicks to work with! Remember – if there isn’t enough data, it’s hard to make any changes or improvements! You will need at least 15 conversions in the last 14 days, and at least 7 conversions in the last week for it to work properly.
How to scale campaigns using Target ROAS?
You can set target ROAS at any percentage that helps you generate more eCommerce sales and profit. You might want to choose a lower number for new campaigns that are still building up traffic or conversions, versus an established campaign that’s already hitting your target goal. For example, if you’re trying to get more customers on board with paid advertising you might target 200%. Once you’ve reached your target goal, then try increasing the target so you can maximize return on ad spend and revenue.
In summary, understanding ROAS is very important for any business with digital advertising as it drives the profitability of your campaigns. ROAS is a key metric that can help you measure whether or not you are creating value from your Google Ads campaigns and if they should be continued in future.
If you need help with ROAS or any other digital marketing challenges you have, get in touch with Move Ahead Media. We’d love to take a look at your account and perform a digital marketing audit. This includes a full analysis of your account, campaign and ad group performance, keywords, and anything else of importance to your business. You can use the data from this audit to enhance your digital marketing efforts to get to new heights! Call us today to learn more.