PPC ad campaigns are a great way to spread your online reach without breaking the bank. Since this advertising method only requires payment when someone clicks on your ad, you’re not wasting money on advertisements that don’t go anywhere. However, it’s not enough to set up a PPC campaign and start seeing results.
As a business, you need to understand various metrics to comprehend the state of your profits and remain competitive. Return on investment (ROI) and cost per click (CPC) are some of the essentials when it comes to rating the success of a PPC campaign. After all, you need to know how much profit you’re earning in addition to how much a successful click will cost you.
While these are great metrics to have on your side, you shouldn’t stop there. Understanding return on ad spend (ROAS) can help you gain even deeper insight into your PPC campaigns and further increase their effectiveness.
How to Calculate ROAS
ROAS is in many ways like ROI: they both provide a way to judge how much you earn from your advertisements and campaigns. If the values aren’t in the right range or meeting goals, then it’s time to adjust the ad strategy or even drop a PPC campaign altogether. Understanding them both can give you even more information.
Unlike some other e-commerce metrics, it’s rather simple to calculate ROAS: You divide the revenue from advertising by the cost:
ROAS = Ad Revenue / Ad Costs
For example, suppose you allocate $1,000 to an ad campaign. After you track the campaign process and all the clicks, you find that campaign earned you $4,000 in profit. When you divide that profit by the cost, you get 4,000/1,000, which equals 4, which is your ROAS. This means that for every dollar you spent, you earned $4 worth of sales.
Now compare this to the calculation for ROI: Your net profit divided by the cost of your investment. Because most people track ROI as a percentage, you would then multiply the resulting value by 100:
ROI = Net Profit [Ad Revenue – Ad Costs] / Ad Costs x 100
For the same profit example, you would first take away $1,000 from that $4,000 revenue to determine your net profit, $3,000, then divide by the initial cost of $1,000. This value comes out to 3, which times 100 gives you a 300% ROI.
To get both these metrics, you’ll need to track relevant data from your PPC campaigns. Without that data, you can’t get a full picture of how your PPC campaigns are functioning, let alone how to make improvements.
How to Use ROAS in Your PPC Campaigns
When you start to calculate ROAS, you have a way to tell how effective your PPC ad campaigns are. A ROAS of 1 means that you’ve broken even, and anything below that means you’re losing money from an ad. One of the first ways to make effective use of this metric is to identify which PPC campaigns are helping you earn income. If their ROAS is below one after your set goal period, then that’s probably a campaign you’re better off shutting down or updating into a more effective form.
However, you can’t settle for a ROAS of 1. After all, if you’re breaking even on a campaign, then you’re not earning any profit and your business can’t grow.
You can also use ROAS to help set goals for your PPC campaigns. By setting the goal ROAS value, you can then reverse the equation to understand how much revenue you’ll need to make through an ad campaign for it to be worthwhile:
Ad Revenue = ROAS x Ad Cost
For example, let’s say you put $1,500 into an ad campaign. You’re aiming for an ROAS of at least 3, which is a comfortable threshold for your business. You’d then multiply the two values, which gives you a goal revenue of at least $4,500 to become a successful campaign. With these numbers in mind ahead of time, it’s much easier to see how your ad is faring.
When your ROAS is higher, you can expect to see fewer expenses per sale and higher profits, which in turn allows you to further invest into and grow your business.
Determining a Healthy ROAS
The goals of every company are different, so what counts as a healthy ROAS may vary. The industry standard for a minimum ROAS can range around 3-5. With 3 as the minimum value for “passing.” If your campaigns are below this point, there’s a strong chance you’re losing money once you start to factor in your other business costs.
Of course, different businesses have different requirements. What may be a steady ROAS of 4 for one business may not seem so great for a company that requires a ROAS of 9 to remain profitable. The key to this metric is to understand your business and your budget to determine what level meets your needs and aligns with your profit goals.
How to Increase Your ROAS
Since a higher ROAS means more steady profits, working to increase this metric can be an important part of your business strategy. To increase the value of ROAS you need to do one of two things: reduce your ad costs, or increase your profits.
When dealing with PPC campaigns, you have a great deal of control over what ad campaigns you follow through on. While you may not always be able to pick the perfect price point, there is some flexibility in the matter. Getting rid of campaigns that don’t bring in any worthwhile investment, even if the CPC is cheap, and targeting more niche keywords are some methods.
Of course, when you take the opposite approach, you can keep the cost of your ad spending the same while increasing income. The best approach to this is to work on conversion rate optimization (CRO). This process involves various strategies geared toward increasing the number of successful conversions and increasing the profit from existing conversions. Various adjustments to your marketing efforts and your site layout and design can help facilitate CRO, which in turn will pull up your ROAS.