How to Calculate ROAS – The Ultimate PPC Metric

Christian Thomson
LinkedIn

Christian is a British-born entrepreneur and founder of Marwick. For over 19 years, Christian has successfully helped businesses excel in digital marketing. Founded in 2012, Marwick has grown from a start-up to the 11th Fastest Growing Company in Canada in 2020 and expanded into the UK in 2019.

When you are investing in Pay Per Click (PPC) marketing, you want to be sure that you are getting the best possible value for the money you spend. PPC metrics are tools that are used by marketers to help determine the effectiveness of their PPC advertisements. Some of the metrics that marketers use includes the number of clicks, profit per click, click-through rate, and conversion rate, though there are several others.

One metric that you absolutely should be using is ROAS, but what is it, what does it represent, and why is it important?

 

ROAS Meaning

ROAS stands for “Return On Ad Spend.” Simply put, this is the money that you earn back due to the amount you spend on your advertising, measuring the amount of revenue earned on every dollar spent. While the two are similar, ROAS should not be confused with Return on Investment (ROI), which is concerned more with long-term results and objectives. ROAS looks at the shorter-term impact of your tactical spending.

 

ROAS Formula

On the surface, the calculation of ROAS is simple: divide the total earned revenue by the amount spent on advertising (ROAS= revenue attributable to ads/ the amount paid on advertising), though there are different ways of calculating the cost of ads, as we will examine below.

 

ROAS Calculator/ How to Calculate ROAS

While you may want to track only the dollar amount that you spend on a given ad platform, you might also choose to include additional advertising costs, which include:

 

  • Salary Costs from the in-house or contracted personnel managing your ad campaign
  • Affiliate Costs including individual affiliates and affiliate network fees
  • Vendor Costs such as fees and commissions from vendors facilitating the ad campaign

 

Depending on the ad you are running, you may prefer to calculate the ROAS based entirely on ad costs, with a separate ROAS including the additional expenses, giving you a more detailed and thorough look at the profitability of your campaign.

Some other common expenses that you might want to consider include paying for the creation of ad copy and graphics for banner ads. You may also choose to have an employee track the performance of your ad to adjust ad spend as needed. There may be administrative costs to factor in as well.

Here is an example of calculating ROAS for a company that sells specialty pet products:

The owner has been running a campaign to promote a new product and wants to calculate ROAS. His total cost for the clicks he received is $5,000. He also had a copywriter write copy for the ad, costing him $500. His digital marketing team, responsible for tracking the ad and adjusting ad spend, was another $1,500.

Overall, this means the total ad spend was $7,000, with the ad campaign resulting in sales totaling $14,000. This means that the ROAS is $15,000/ $7,000 or 200%. With this information in hand, informed decisions can be made about whether to continue the ad campaign or not.

 

What is a Good ROAS?

There are several factors to consider when determining if your ROAS is “good” or not. The answer is influenced by your industry, your profit margins, and the average cost-per-click (CPC). Most companies will strive for a ratio of 4:1, meaning they will earn $4 for every $1 spent in ad costs.

 

ROAS for Google Ads

Each business will have its own definition of the ideal ROAS, but generally speaking, if your ROAS is below 3:1, you should review your marketing, as there’s a good chance you are losing money. At 4:1 ROAS, you are probably turning a profit, while at 5:1, you are likely doing well and profiting nicely.

 

Target ROAS

When setting a target ROAS, you are stating the average conversion value that you would like to receive for every dollar that you spend.

Some ways to set an appropriate ROAS target for your business:

  • Consider using the recommended target found on your Google Ads recommendation page. The targets that you find here are based on your historical performance and also account for conversion delays.
  • Try to set your target ROAS using the historical data of conversion value per cost for any campaigns to which you want to apply this strategy. This will be help maximize the conversion value while still reaching the same return on ad spend that your campaign typically receives. Be sure to account for conversion delays. See here for more info on lag reporting.
  • If you are looking for your historical conversion value per cost data, you can find it by first selecting Modify Columns in the “columns” drop-down and adding the Conv. Value/ Cost column from the list of “Conversions” columns. Take the conversion value per cost metric and multiply it by 100. This will give you your target ROAS as a percentage. You will need to ensure that your ROAS evaluation’s time frame is in line with your in-app action’s conversion window to receive the most accurate view of how your campaign is performing.

 

Improving Your ROAS

To get the best performance from your ads, you will want to improve your ROAS. Some of the ways that you can accomplish this include:

 

Launching a Branded PPC Campaign

A branded PPC campaign is one that uses your company’s name. It can help you to earn a better return on your advertising. Branded searches usually result in conversions due to the fact that when a user is searching for a brand they are already interested in the company and are likely prepared to make a purchase.

 

Using Negative Keywords

You can help to improve your ROAS with the use of negative keywords. These are keywords for which you want to exclude your ads from appearing in search results. Negative keywords may be similar to your targeted keyword but typically fall outside of the scope of your business.

 

Optimizing Landing Pages for Speed, Usability, and Conversion

While this is not a new tactic by any means, ensuring that your landing pages provide the speed and usability that users desire and an easy means of taking action, you can improve your ROAS.

 

Why ROAS Matters

Making use of ROAS lets you evaluate the average performance and financial return of your ad campaigns and gives you the data you need to make informed decisions regarding your online strategy.

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