Measuring PPC Performance: The ROAS Formula for Google Ads
Businesses should constantly be looking for ways to measure and improve the effectiveness of their search marketing efforts. One powerful metric that can provide valuable insights into PPC campaign performance is Return on Ad Spend (ROAS). By tracking ROAS, businesses can gauge the success of their advertising campaigns and make informed decisions about marketing budget allocation.
ROAS is a KPI that represents the amount of revenue generated for each dollar spent on advertising. It is calculated by dividing the revenue generated from ads by the cost of the ads. For example, if a business spends $1,000 on Google Ads and earns $5,000 in revenue from those ads, the ROAS figure would be 5 (5,000 / 1,000 = 5).
Understanding ROAS is essential to interpreting marketing performance because it helps businesses measure the profitability of their advertising investments.
By setting a target ROAS based on the profit margins and advertising costs of your business, marketers can optimize their Google Ads campaigns to meet specific goals. ROAS can also be used to make an apples to apples performance comparison of different advertising channels, attribution models, and campaign types.
In this article, we dive deep into the concept of ROAS and explore how businesses can use this metric to evaluate and optimize their paid search efforts. We also look at the key factors that influence ROAS and provide practical tips for calculating and improving it.
What is ROAS?
ROAS, or Return on Ad Spend, is a critical metric used in Google Ads to evaluate marketing performance. It measures the profitability of advertising investments by calculating the revenue generated for each dollar spent on ads.
With ROAS, businesses can gauge the effectiveness of their Google Ads campaigns and make data-driven decisions about their marketing budget allocation.
A high ROAS indicates that campaigns are generating significant returns, while a low ROAS may signal the need for improvements in targeting, bidding strategies, or messaging.
Using ROAS as a north star metric allows for efficient allocation of resources and maximizes return on advertising investments.
The Google Ads ROAS formula
The formula for ROAS is simple:
ROAS = Revenue Generated from Ads / Advertising Spend
The inputs for calculating ROAS are the revenue generated from your ads and the amount you have spent on advertising. By dividing the revenue by the advertising spend, you get the ROAS, which represents the return you are getting for every dollar invested in ads.
The output of this calculation is a ratio or percentage that indicates how well your advertising efforts are performing. For example, if the ROAS is 5, or 500%, it means you are generating 5 dollars in revenue for every dollar spent on ads.
Things to consider when calculating ROAS
When calculating ROAS (Return on Advertising Spend), it’s important to consider several factors to ensure accuracy. One key factor is the attribution model used. Different models attribute conversions to different touchpoints, so choosing the right model for your business and sales motion is essential.
Another factor to consider is the quality of your data. Ensure that your revenue data is accurately tracked and that it includes all relevant sources. Additionally, take into account any costs associated with your advertising efforts, such as employee salaries or production costs, to get a more comprehensive view of your ROI.
The time frame over which you calculate ROAS is also crucial. Longer periods may provide a more accurate representation of your campaign performance, as shorter periods may not capture significant fluctuations in revenue.
Lastly, it’s important to regularly reassess your ROAS calculation and adjust your strategies accordingly. Market conditions, competition, and industry trends can greatly impact your ROAS, so realigning your advertising efforts in response to these changes is vital.
By considering these factors when calculating ROAS, you can ensure that you have a clearer understanding of the effectiveness and profitability of your Google Ads campaigns.
How to optimize PPC account for ROAS
To optimize your Google Ads account for a higher Return on Advertising Spend (ROAS), there are several key strategies you can implement.
Firstly, thoroughly analyze your search campaigns to identify underperforming keywords or ad groups. By carefully adding negative keywords, honing targeting and refining your bidding strategies, you can ensure that your ads are only shown to the most relevant audience, maximizing your chances of conversions and increasing ROAS.
Next, consider adjusting your target ROAS based on your specific business goals and profit margins. This will help you focus on achieving the desired return while considering the cost of advertising and maximizing your profit.
Regularly review your ad messaging, calls to action, and landing page experience to enhance your click-through rate (CTR) and conversion rate. Remember that your Google Ads don’t exist in a vacuum, and your competitors are constantly tweaking and optimizing, so you should be too.
Lastly, try using session replay tools to gain insights into the effectiveness of your landing page experience. Use custom conversions to accurately map the funnel and optimize from top to bottom.
By incrementally improving your targeting, adjusting your strategy, and optimizing your ad performance, you can maximize your return on advertising spend and improve your PPC campaigns.
Tip: Review your attribution model
One essential tip for maximizing your ROAS in Google Ads is to review your attribution model. The attribution model determines how credit for conversions is assigned to the various touchpoints in a customer’s journey. By default, Google Ads uses a data-driven attribution model.
However, while Google touts this as the best approach, it may not accurately reflect the true impact of your advertising efforts. Different marketing channels and touchpoints play a role in influencing a customer’s decision to convert. By reviewing and potentially adjusting your attribution model, you can gain a more comprehensive understanding of how each marketing channel contributes to conversions and adjust your budget allocation accordingly.
There are several attribution models to choose from, including first-click, linear, time decay, and position-based. Each model distributes credit across touchpoints differently, allowing you to evaluate the impact of your marketing efforts more holistically.
For example, if you find that your marketing campaigns are effective at generating initial interest but struggle to convert customers, you might consider using a first-click attribution model. This model gives more credit to the first touchpoint a customer interacts with, which can help you identify the channels and keywords that are successfully driving awareness and consideration.
On the other hand, if your campaigns excel at closing the deal but struggle to attract initial interest, a position-based attribution model might be more appropriate. This model can assign 40% of the credit to both the first and last touchpoints, with the remaining 20% distributed evenly among the intermediate touchpoints. By using this model, you can emphasize and optimize the channels or keywords that are responsible for initiating and finalizing conversions.
Regardless of the attribution model you choose, regularly reviewing and adjusting it based on the performance of your advertising campaigns is crucial. It allows you to allocate your advertising budget more effectively and focus on the channels and keywords that provide the highest return on investment.
ROAS measurement tools
Sometimes, native ad platforms don’t work or give the true ROAS picture (we’re looking at you Facebook). In that case, there are measurement tools that can help, one that we recommend is TripleWhale.
TripleWhale provides in-depth insights into key metrics such as revenue generated, cost per conversion, and overall return on investment. With a user-friendly interface and comprehensive reporting capabilities, TripleWhale enables businesses to make data-driven decisions and optimize their Google Ads campaigns for maximum ROI.
In addition to TripleWhale, there are other similar tools available in the market that can help you measure and optimize your ROAS including Northbeam and TrueROAS. By using these tools, you can gain a better understanding of your advertising performance, identify areas of improvement, and make more informed decisions to drive business growth.
ROAS & Google bid strategies
What is the target ROAS bid strategy?
Target ROAS (Return on Advertising Spend) is a bidding strategy in Google Ads that helps businesses maximize their return on investment (ROI) by setting a specific target for their advertising efforts. This bid strategy uses machine learning to adjust bids in real-time based on the probability that a click will result in a conversion, ultimately meeting the desired ROAS.
By implementing target ROAS, businesses can optimize their bidding and spend efficiency within ad campaigns. When setting a specific target ROAS, you should take into account factors such as profit margins, advertising costs, and the desired level of profitability. This ensures that ad spend is directed towards campaigns and keywords that are most likely to drive profitable results.
Here’s how target ROAS bidding strategies work:
1. Businesses set a target ROAS, such as 300%.
2. Google Ads uses machine learning algorithms to analyze user behavior, historical conversion data, and other relevant factors.
3. The algorithms then adjust the bids in real-time based on the likelihood of a click resulting in a conversion that meets the target ROAS.
4. Ad spend is allocated more efficiently towards keywords and campaigns that have shown a higher probability of meeting the desired ROI.
Target ROAS can be seriously effective for eCommerce advertisers. It allows you to spend more efficiently by focusing budget into the best areas. With Google’s machine learning algorithms becoming better by the day, this bid strategy should continue to improve even further over time.
Using target ROAS in Performance Max campaigns
Using target ROAS in Performance Max (aka Pmax) campaigns can significantly improve the performance and efficiency of your Pmax campaigns.
Performance Max campaigns are designed to maximize performance (hence the name…) across inventory, placements, and audiences by using automation to optimize ad placements for more conversions. By incorporating target ROAS into these campaigns, you can further enhance their effectiveness.
With target ROAS bidding strategies, you can consider revenue goals and target a specific return on ad spend. This approach allows you to focus spend on the Pmax assets that have shown a higher probability of meeting your desired ROAS.
In summary, using target ROAS can help you optimize Performance Max campaigns and drive more impactful results. With automated bidding and real-time adjustments, you can ensure that your ad spend is directed towards the most valuable opportunities, ultimately increasing the efficiency and profitability of your Google Ads campaigns.
How to create a custom ROAS column in Google Ads
Creating a custom Return on Ad Spend (ROAS) column in Google Ads can be a useful way to track the performance of your advertising campaigns. Here’s a step-by-step guide to creating a custom ROAS column:
1. Log in to Google Ads
Open your web browser and go to the Google Ads website. Log in to your Google Ads account using your credentials.
2. Navigate to the Campaigns Dashboard
Once you’re logged in, you’ll land on the main dashboard. From here, click on “Campaigns” in the left-hand menu to access your list of campaigns.
3. Choose Columns to Customize
On the campaign dashboard, you’ll see a “Columns” button just above the campaign list. Click on it, and a dropdown menu will appear.
4. Select Modify Columns
In the dropdown menu, click on “Modify columns.” This will open a pop-up window where you can customize the columns that appear in your campaign list.
5. Add Metrics
In the “Modify Columns” pop-up window, you’ll see a list of available metrics categorized into groups such as Performance, Conversions, Clicks, etc. Scroll down and find the “Custom” category.
6. Create a Custom Metric
Click on the “Custom” category, and you’ll see an option to “Create a custom column.” Click on it to start creating your custom ROAS column.
7. Name Your Column
In the “Create a custom column” section, you’ll be asked to name your custom column. Enter a descriptive name like “Custom ROAS” or something similar.
8. Choose the Formula
You’ll need to define the formula that calculates the ROAS. ROAS is calculated as (Revenue / Cost), so you’ll need to select the relevant metrics from the available options. Typically, you’ll select “Conversion value” as the Revenue metric and “Cost” as the Cost metric.
9. Add the Metrics
Drag and drop the “Conversion value” metric and the “Cost” metric from the left side to the right side of the “Create a custom column” section. These metrics will be used in your ROAS formula.
10. Define the Formula
In the “Formula” field, enter the formula for ROAS: “Conversion value / Cost”. Google Ads will automatically perform this calculation for each campaign.
11. Set Decimal Places (Optional)
You can choose the number of decimal places you want to display for your ROAS values. This can help keep the data clean and manageable.
12. Apply Column to View
After setting up the formula and other preferences, click the “Apply” button to save your custom ROAS column configuration.
13. View Your Custom Column
Go back to the campaign dashboard, and you should now see your beautiful new custom ROAS column among the other columns.
That’s it! You’ve successfully created a custom ROAS column in Google Ads. This column will now display the calculated ROAS values for each of your campaigns, helping you evaluate the performance of your advertising efforts more effectively. Remember that ROAS can vary significantly based on your industry, goals, and campaign strategy, so it’s important to interpret the values in the context of your specific objectives.
When should you use ROAS instead of CPA
While Cost per Acquisition (CPA) is commonly used to track the cost of acquiring a sale, ROAS provides a more comprehensive view of the profitability of your marketing efforts.
ROAS is particularly useful for ecommerce advertisers who sell products online. Unlike CPA, which focuses on the cost of acquiring a customer, ROAS takes into account the revenue generated from each ad campaign. This makes it the ideal metric for evaluating the success of digital advertising campaigns and optimizing marketing strategies.
By using ROAS, ecommerce advertisers can assess the effectiveness of their advertising efforts in generating sales and revenue. It allows them to analyze which campaigns, keywords, or ad groups are driving the most profitable results. This insight is crucial for making data-driven decisions and optimizing advertising budgets.
In addition, ROAS can be used to compare the profitability of different advertising channels or campaigns and their relative contribution to topline revenue. For example, you can analyze the ROAS of your Google Ads campaigns versus other digital marketing channels to determine where to allocate your advertising budget for maximum revenue impact.
ROAS is loved by ecommerce advertisers as it provides a clear understanding of the profitability of their advertising campaigns. By using ROAS instead of CPA, businesses can make informed decisions to optimize their marketing efforts and drive better results.
What’s a Good ROAS
While ROAS can vary depending on factors such as the type of business and industry, there are some general benchmarks to consider:
- On average, a healthy ROAS falls between 3:1 and 6:1, meaning for every dollar spent on ads, you generate $3 to $6 in revenue.
- eCommerce businesses typically aim for a ROAS of at least 4:1 to ensure profitability.
- Service-based B2B businesses may have even higher ROAS targets due to high average deal sizes.
Remember, these are just high-level industry averages, and the ideal ROAS may vary depending on your specific business and goals. What’s most important is that you’re tracking it accurately, as what’s measured can be improved. It’s important to continuously monitor and optimize your campaigns to achieve the highest ROAS possible.
How to improve ROAS in Google Ads ROAS
Achieving a high Return on Ad Spend (ROAS) is the goal of every Google Ads campaign. It is a measure of how effectively your advertising efforts are contributing to revenue generation. While there is no one-size-fits-all formula for increasing ROAS, there are strategies that can help improve results. In this article, we will explore some practical tactics to boost your ROAS in Google Ads, ultimately maximizing the profitability of your advertising campaigns.
Optimize Conversion and Marketing Attribution
Understanding the customer journey and the marketing activities that contribute to conversions is crucial for increasing ROAS. Implement both primary and secondary conversion actions to properly allocate credit to each touchpoint in the funnel.
Continuously Test and Refine
Improving ROAS in Google Ads requires constant monitoring and experimentation. Test different ad formats, messaging, and keyword bids to identify what works best for your audience. Regularly analyze campaign performance, cost per conversion, and other marketing metrics to pinpoint areas that need improvement. Make data-driven decisions and implement iterative changes to optimize your campaigns and increase ROAS over time.
Optimize ad copy
The headlines and descriptions of your ads play a crucial role in capturing your audience’s attention and driving clicks. By crafting more compelling and persuasive ad copy, you can significantly improve performance and increase your Return on Ad Spend (ROAS).
First, focus on creating attention-grabbing headlines that resonate with your target audience. Use strong and impactful language that highlights the unique benefits and value proposition of your product or service. Remember that you’re advertising to people, not robots. Consider using power words and emotional triggers to evoke curiosity and interest.
Next, ensure that your ad descriptions complement your headlines and provide clear and concise information. Highlight key benefits (instead of features), special offers, and unique value props to convince users to click through to your website. Using relevant keywords can help improve ad relevancy, CTR and corresponding quality score.
Lastly, ABT – always be testing. Iterate on your ad copy to find what works best for your audience. Split testing different variations of headlines and descriptions can help you refine your messaging and identify the most effective combinations. Regularly analyze the performance metrics of your ads to make data-driven decisions and optimize for better results.
Optimize landing pages
Think about the post-click experience, aka your landing pages. Landing pages play a crucial role in the success of your Google Ads campaigns and overall ROAS (return on ad spend). These dedicated webpages are designed to drive conversions by providing a great user experience and matching the search intent of your ad.
By aligning your landing page content and design with your ad messaging, you can increase the likelihood of capturing the attention and converting potential customers. Clear and compelling calls to action, persuasive copy, and engaging visuals can all contribute to bumping up your conversion rate.
An optimized landing page can also improve the quality score of your ads, leading to better ad positions and lower costs per click. Google Ads rewards advertisers who provide users with relevant and engaging landing page experiences, resulting in higher conversion rates and improved ROAS.
Don’t forget to regularly analyze and optimize your landing pages to continuously improve your campaign’s performance.
Use custom audiences and segments
Custom audiences allow you to target specific groups of people based on their demographic information, interests, and behaviors. By creating custom audiences, you can refine your targeting to reach the most relevant potential customers for your business.
Try using remarketing audiences to target users who have previously interacted with your website or ads. This allows you to stay top of mind and remind them of your product or service, gradually moving them down the buying funnel. Remarketing campaigns can be highly effective in driving conversions as you are targeting users who have already shown interest in your business.
By using custom audience segments and remarketing, you can optimize your Google Ads campaigns to reach the right people with the right message at the right time. This targeting approach can significantly improve your campaign performance and ultimately, your return on advertising spend (ROAS).
Conclusion
ROAS is powerful, relatively easy to calculate, but sometimes a challenge to attribute. By setting up a robust campaign foundation and regularly optimizing your campaigns, you should be able to get a killer ROAS that proves the value of Google Ads.
While the metric is mostly used for eCommerce advertisers, it does have it’s place in B2B PPC campaigns too. Interested in getting a higher ROAS? Get in touch with our team, we offer free ad account audits and would love to chat.