What ROAS Is and What It Means for Your eCommerce PPC Campaigns
by Ron Dod
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It’s not news that analytics is the key to understanding how your eCommerce PPC ads are performing so you can fine-tune the campaigns and increase your profits.
But what metrics should you measure in order to accurately evaluate the effectiveness of your ads?
After all, there are many “vanity metrics” that could paint the wrong picture and distract you from making improvements that matter.
In this article, you’ll learn about the most important metrics for online advertisers and how to apply it to your eCommerce PPC campaigns.
ROAS stands for “return on ad spend” and answers the fundamental question that any marketer should ask: If I invest X dollars into this advertising channel or ad campaign, how much revenue will I generate?
It measures how many dollars you get back for every dollar you spend on an ad campaign, ad group, ad and/or keyword.
If a marketing channel or campaign isn’t generating the target profit, then it’s not worth the time and resources you invest in it.
A simple way to calculate ROAS of a specific marketing component is by subtracting its cost from the revenue it generates and then dividing the number by the cost: (Revenue – Cost) / Cost.
Keep in mind that the ad spend may include other expenses you’d incur in creating an ad or generating the sales–e.g., designer fees for creating the graphic, vendor/partner cost or affiliate commission.
For an eCommerce business, ROAS is quite straightforward to calculate since you can track each click all the way to the sale. For example, by tracking purchases as the conversion event in a Google Ad campaign, you can see how much revenue a particular campaign, ad group, ad or keyword has generated.
Since making the connection between an ad campaign and a conversion event is quite direct for eCommerce businesses, ROAS is a highly effective metric for identifying the best performing ad campaigns.
What You Can Learn from ROAS
If you aren’t generating sales and making money with your eCommerce PPC campaigns, then something needs to change!
ROAS is the key metric that shows you what needs to be improved in order to drive sales and increase profit.
You may wonder, what about all the other data I see in analytics?
While many metrics can indicate different aspects of an ad’s performance, they don’t tie a click directly to your profit as ROAS does.
For example, click rate doesn’t tell you the quality of those clicks. You could be paying for the clicks but not making sales. Conversion data doesn’t account for the total cost of running the campaign and making the sale. If a campaign has a high cost-per-sale (e.g., you’re attracting leads that make a lot of return), then you could be losing money every time someone makes a purchase!
ROAS, on the other hand, shows the direct relationship between cost and profit–giving you the necessary insights to dial in the different variables to lower costs and increase profits.
What’s a Good ROAS?
While there’s no hard and fast rule for defining a “good ROAS,” a simple rule of thumb is to hit a minimum of 3:1. However, every business is different and some may need a ROAS of 10:1 to be profitable.
If a ROAS is below 3:1, you should revisit your campaign strategy. At 4:1, your campaign is turning a profit and at 5:1 or higher, you’re in pretty good shape. Analyze what’s working and do more of it!
What ROAS means for your eCommerce company is this: If your ROAS isn’t hitting the ratio that will make your business profitable, you can adjust all the factors affecting the equation so you can bring up the number (and we’ll show you how in this article).
In addition, you can combine ROAS with customer lifetime value to gain important insights that inform future budgets, strategy and overall marketing direction for your eCommerce business.
How to Increase ROAS of Your eCommerce PPC Campaigns
Remember the formula for calculating ROAS? It’s pretty simple: (Revenue – Cost) / Cost.
There are only two variables. The more you can increase the revenue and/or reduce the cost, the higher your ROAS will be.
Maximize Revenue for Your eCommerce PPC Campaign
You have to drive more high-quality traffic to your eCommerce website and encourage visitors to make a purchase in order to increase revenue. Here’s how to turn as many clicks into transactions as possible:
Refine audience targeting: Identify audience segments that are most likely to convert into buyers with high customer lifetime value and show products that are most relevant for each segment.
Improve ad copy: Ensure that the ad copy speaks to the audience segment. Highlight special offers and add urgency (e.g., use Google’s countdown feature) to capture attention.
Target shoppers with high purchase intent: Target search terms commonly used by consumers ready to make a purchase–e.g., long-tail keywords that include specific brand, color or size, and terms such as discount or free shipping.
Match ad copy to landing page content: Create dedicated landing pages that match the content of your ads to deliver a consistent user experience and minimize the friction to conversion.
Optimize for mobile: As more consumers are shopping on mobile devices, you don’t want visitors to leave your site just because it’s not mobile-optimized. You’d be paying for the clicks but driving away the sales!
Improve the Quality Score of your campaign: A high Quality Score, which indicates that the ad and the landing page are relevant, can help your ad rank higher in relevant searches and get more high-quality traffic.
Use retargeting ads: Boost response by up to 400 percent with a remarketing strategy that shows ads to consumers who have already visited your eCommerce website and demonstrated an interest in specific products. You can also reduce cart abandonment by retargeting shoppers who left items in their carts.
Increase average order value (AOV): Increase the amount each shopper spends with upsell, cross-sell and bundles to generate more revenue for each click.
Lower the Cost of Your eCommerce PPC Campaign
The other half of the equation is to lower the cost of your campaigns by reducing wasted spend and getting more high-quality clicks at a lower bid:
Balance competitiveness with cost: Be savvy about the keywords you bid on. Top-performing keywords may drive traffic but the high competition can drive up the cost-per-click, diminishing your profit significantly.
Optimize campaign setting: Narrow down your targeting based on locations, languages, networks, devices, etc. to show your ads only to audiences with the highest likelihood to convert.
Evaluate under-performing keywords: Pause keywords or placements that aren’t driving high-converting traffic. Review the analytics on different traffic sources, schedules and networks so you don’t pause channels on which an ad is actually performing well.
Add high-converting long-tail keywords: Look at the “search term” tab to see which long-tail keywords trigger your ads and add them to your campaign to target high-quality prospects at a low cost.
Include negative keywords: Use information from your search term report to identify keywords that are generating clicks but not conversion. Add them as negative keywords to your campaigns so you won’t be paying for clicks that don’t convert.
Leverage automated bidding: Optimize your bidding with Google’s AI-driven smart campaigns, which allows you to respond to searchers’ behaviors in real-time and optimize your bids.
Display price on the ad: Weed out shoppers who aren’t a good fit with your pricing strategy so you aren’t paying for their clicks.
Show ads at specific times: Find out when the most conversion occurs on your website and set the ads to run only during those specific time periods. If you sell seasonal products, you can adjust the campaigns by month.
Pause unprofitable campaigns: Review your analytics frequently and pause campaigns that haven’t been generating sales.
Assess other costs: Evaluate expenditures associated with running the ads–e.g., graphic design, copywriting, ad management, affiliate commissions, etc.–to see if there’s any wastage you can eliminate.
In order to get the correct data to fine-tune your PPC campaigns, make sure your tracking is set up properly to collect the right data.
Besides traffic-focused metrics such as click volume, click-through rates and cost per clicks, make sure to track conversion actions (i.e., sales and revenue) that result from those clicks.
In addition, perform A/B testing and set up custom reporting to help you focus on the metrics that matter.
A data-driven, systematic approach to PPC campaign management is the key to increasing ROAS and boosting your profits.
Ronald Dod is the Chief Marketing Officer and Co-founder of Visiture, an end-to-end eCommerce marketing agency focused on helping online merchants acquire more customers through the use of search engines, social media platforms, marketplaces, and their online storefronts. His passion is helping leading brands use data to make more effective decisions in order to drive new traffic and conversions.
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