16/05/2023

How to calculate, implement, and maximize ROAS in Google Ads

Even if you’re new to Google Ads, you know that to be successful and increase your company’s profits via online ads, you must consider a wide set of metrics.

By understanding and analyzing these metrics, you can efficiently measure the success of your campaigns, therefore identify which ads are performing well and should be maximized, and which ads need to be improved or eliminated.

Today, we are going to focus on your Return on Ad Spend (known as ROAS in Google Ads). This is one of the most important metrics for achieving greater insight into what’s leading to conversions and how much profit your ads are generating for your business.

What is ROAS?

As mentioned above, ROAS stands for Return on Ad Spend, and measures the amount of revenue your business earns for each euro you spend on advertising. Its main purpose: to determine how well your ads are performing and provide a numerical return value on each ad.

To measure ROAS in Google Ads, you must know how much you are spending and your target return. Once established, you can measure ROAS at different levels within your account, from the account level all the way down to ad groups and individual ads.

Within the ROAS metric, it is essential to note that contributing factors to Return on Ad Spend will include your keywords, audience targeting, and providing quality and useful content to convert customers.

How do you calculate ROAS in Google Ads?

The ROAS formula is simple, nevertheless the numbers that it involves can take time to track. Your Return on Ad Spend equals the Total Conversion Value divided by your advertising costs. The Total Conversion Value measures the amount of revenue your business earns from a given ad conversion.

While your ROAS average will vary by industry and Marketing goals, a good ROAS average is generally around 4:1. A very successful ROAS will be 5:1, meaning that if your ad is generating 10 dollars in revenue and it costs 2 dollars, for each euro you spend you, earn 5 dollars back.

You might notice this calculation bears a striking resemblance to the ROI equation (net return on investment divided by the cost of the investment, multiplied by 100). The difference here is that ROI tends to look at the big picture, while ROAS will be more specific, depending on the level you are investigating (overall account vs. individual ads, etc.)

Simply put, Return on Ad Spend can be a highly useful data point to know when deciding where to spend your budget in Google Ads.

Why does ROAS matter?

Along with other metrics that track your campaign performance, ROAS indicates to you the health of your ads and their current return value. Basically, if your ad campaign is performing above expectations, you may want to consider increasing your budget or assets in this area. On the other hand, if you are not seeing the expected return for an ad campaign, you can delve into what might need improvement or consider eliminating the campaign altogether. But all of this hinges on tracking ROAS…

How do you implement ROAS in Google Ads?

1. Set up a campaign with target ROAS:

The first step in implementing ROAS in Google Ads is to set-up a campaign with target ROAS. Here‘s a step-by-step breakdown:

Enter in your Google Ads account
Select the campaign you would like to optimize with target ROAS
Click on the “Settings” tab within the selected campaign
Click on “All Settings”
Scroll down until you find “Bid Strategy” + press “Edit”
Click on “Change Bid Strategy” + select “Target ROAS”
Enter your desired ROAS percentage
Save it!

2. Implement conversion tracking:

In order to see the ROAS performance of your ad campaigns, you must keep track of your conversions. This way, you will be able to understand how effectively your ad clicks lead to valuable and important customer activity on your site, such as purchases, sign ups, or form submissions.

To implement conversion tracking, you need to create a tracking code or “tag”, and add this tag to your website and pages. Discover Google’s step-by-step explanation on how to set up conversion tracking.

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How can you improve your ROAS in Google Ads?

If you notice that one of your campaigns has a ROAS below 3:1, you are falling below average and you need to make some changes! Your ROAS health is primarily determined by your ROAS accuracy, ad cost, and targeting:

1. Review your ROAS accuracy:

Reviewing that your ROAS is implemented correctly and that your parameters are accurate is step 1. If your parameters aren’t accurate, you may end up dropping a highly effective and competitive campaign for no reason!

To review the accuracy of your Return on Ad Spend, ask yourself these kinds of questions:

Am I considering all the costs of advertising?
What Google Ads attribution model am I using?
Am I including costs outside of my advertising costs?

2. Lower your ad costs:

If you manage to lower your ad costs, it will drastically improve your ROAS average. To do so, consider these factors:

Reduce resources dedicated to ad management: If you are struggling to obtain good results and are spending too much time and resources on ad management without any pay off, you might want to consider outsourcing it.
Review audience targeting and keywords: Make sure that you are not wasting advertising dollars on keywords that you do not want to target. Remember, the better your keywords speak to your ads, the more clicks and conversion you’ll obtain.
Improve your Quality Score: A higher Quality Score results in a better ranking on Google search engines, which leads to more traffic to your site while reducing bid costs.

3. Generate better ad performance:

To obtain a better understanding of how exactly to improve the performance of your ads, make sure that you are measuring ROAS alongside a variety of other metrics (more on this in the next section). Experiment with these best practices for generating high-quality content and increased revenues:

Optimize your keywords: Take another look at your keyword research. As the foundation of your ad campaigns, keywords not only need to be relevant to the products and services you offer, but they should also be highly segmented by ad group and landing page.
Test your Landing Pages: If you have a high click-through-rate for a specific ad and a low ROAS, you might have a problem with your landing page. Test your landing page design and messaging while maintaining consistency with keywords and offers. Discover Google’s best practices for ad and landing page optimization.
Automate bidding: If you are new to Google Ads, you might want to consider Google’s automated bidding feature. It will automatically set a bid so you get as much conversion value as possible at the target ROAS percentage you set.

What are other key metrics to consider alongside ROAS?

In this final section, it is important to note that ROAS is not a single, end-all, be-all metric that will magically improve your campaigns and profits. It must be used in conjunction with other metrics to truly get to the center of your Google Ads performance. These are the most important ones to keep in mind are:

Return on Investment (ROI): As previously mentioned ROI is useful when looking at the big picture and is a general indicator of your overall business performance. You can see how profitable your overall investment is to your business, something your shareholders will be interested in.
Click Through Rate (CTR): The number of people that click on your ad when it appears for one of your chosen keywords. This ratio helps you understand how well your keywords and ads are performing.
Cost Per Acquisition (CPA): The average cost per each action or conversion. When your Marketing goal is to obtain a large number of conversions, this number will give you great insight into real costs for obtaining leads or customers.

If you are a Google Ads beginner, or you’re already underway with your Google campaigns, you now understand why ROAS is such a great metric to start taking into account. Not only will it indicate where your ad dollars are successfully being used within your campaigns, but you will have a real numerical value to measure how much profit your ads are generating for your company.