15 Sep How to Calculate Your ROAS & Ways to Use It via @coreydmorris
Return on ad spend or ROAS is a common metric used in PPC.
While it has been around longer than that, it isn’t a difficult concept to grasp.
That said, it can be fairly simple to calculate or get complex fast – depending on how the “return” part of it is measured.
Return on ad spend = total revenue generated by ads, divided by the cost of ad spend
It can be as easy as dividing the totals of two columns you see regularly in your analytics reports: revenue and cost.
If you read that and thought, “Yeah, I know exactly how much I make on every ad dollar spent,” and can easily calculate my ROAS, then skip down a couple of paragraphs.
If you’re struggling with taking the inputs and pulling it all together, I feel for you.
You’re likely in a place where you don’t have visibility of all the data, have it tied together, or have a more complex sales cycle where things don’t play out in a nice and neat time period.
That’s OK – you can get to a good place with ROAS.
No matter what boat you’re in, ROAS can be an important metric and benchmark.
- It often factors into – and can lead to – true measurement of ROI for an organization.
- It can help with the setting of expectations.
- It can be a more granular metric for decision-making and application deeper in your specific business cases.
7 Ways to Use ROAS in PPC
1. Setting Expectations
PPC is a great channel for getting quick results and to impact a business.
However, even with the best research on the front end, it can often lead to missed expectations.
PPC expectations can vary wildly and be subjective.
ROAS provides a great opportunity to set a benchmark for what success looks like.
A great PPC manager can pull different levers to drive more traffic, spend more budget, or try to find a sweet spot in between.
By establishing a ROAS goal tied to profitability, the PPC team can utilize that metric as a key in their decisions and performance overall.
2. Budgeting
ROAS can serve as a great tool in factoring budget decisions.
Like setting expectations, ROAS can serve as a benchmark helping teams go beyond just looking at bid, budget, click, and conversion ceilings. It is a quality metric.
By utilizing ROAS in determining where the law of diminishing returns is and ensuring it is included in projections and when looking at real past performance, it can be used to help determine ideal budgets and ranges that are acceptable.
In most cases, I have found clients are ok with not capping the budget all and looking at the ROAS number solely to determine how much to spend.
If the spend can be increased and still exceed the target ROAS, then keep spending all day, every day, as we know we’re in profitable territory.
3. Bid Decisions
Getting more granular, bid decisions can also be made based on ROAS.
The ROAS can be calculated at a detailed level and not just at a high level for aggregate or total spend.
When we break down our campaigns into categories like campaign, ad group, ad type, topic, etc., we can get more granular control and insight.
For example, if we’re running Google product listing ads (PLAs) showing up on Google Shopping, we can separate those out as an ad type and get ROAS on those.
Going even deeper, we can drill down to the individual product level to see how different products produce ROAS.
By knowing what the ROAS is at different levels, we can advise and optimize our bid strategies and have more control over what is driving the overall ROAS and positively impact the whole.
4. Ecommerce
One of the first types of businesses that come to mind when thinking about ROAS and its use is ecommerce.
With a lot of the great tools and integrations available, many shopping cart platforms automatically feed revenue data back into Google Ads and Google Analytics.
By using these metrics, we can quickly arrive at our ROAS by taking total revenue divided by total spend.
Note that getting ROAS is likely the easiest part. Determining what an acceptable ROAS overall, that can take more time and work.
That part includes determining profit margins for products, calculating in overhead, and determining the full aspect of ROI to back out what the ROAS needs to be.
5. Lead Generation
A trickier business goal type for calculating ROAS is lead generation.
ROAS might be tougher to back out and measure itself.
However, in most cases, lead generations campaigns have more attention to detail on the ROI side of things and know their sales cycles and overhead.
This makes arriving at ROAS goals easier, while ROAS itself might take more time to calculate based on the length of time from conversion to final sale if that’s how ROAS is truly calculated.
6. Awareness & Other Campaigns
ROAS can be measured in other business goals and applications as well.
Whether it is awareness generation, page views, or other secondary goals, it can still apply.
It might take more work to define what the return is measured as for a sale on awareness campaigns and more measurement through the funnel and attribution modeling, but can still be achieved with the right work to back out the sales metric.
7. Beyond ROAS
While ROAS is a great benchmark and quality guide for paid media, it isn’t the end of the story.
In some cases, it is just the start.
With customer retention, RFM, and lifetime value metrics that can be known in businesses, we can take it out even further.
Tying ROAS to other metrics beyond the sale can lead to incredible insights for use outside of media spend management.
Conclusion
Overall, the ROAS metric is sometimes not considered by companies who are managing ad spend.
While it might take some work to determine what it is based on how sales are defined, it often proves to be a great quality benchmark to use.
If you know that you’re making a certain ROAS constantly, then spend parameters can be removed.
Or, if you don’t know how much to spend or what to expect, then a ROAS goal can be a great starting point to refine from as you can set it at a level that’s profitable regardless of spend.
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