ROAS For Beginners: The eCommerce Metric of Choice

By Kristina McLane | @Hanapin | Account Manager at Hanapin Marketing

For eCommerce Series Week, what could be more important than ROAS (return on ad spend)? While the rest of the posts this week will give great insight into what you should and shouldn’t be doing, my post is geared towards the eCommerce PPC beginner. If you are just starting PPC and you sell things online, both this post and ROAS are for you!

What Is ROAS? 

ROAS is a good metric to judge the performance of an eCommerce account.  ROAS measures how many dollars you get back on each dollar spent on advertising. While ROI (return on investment) can give you an overall picture, ROAS will provide specific performance measurements for each marketing channel. By using ROAS, you may also apply it at the campaign, ad group, and keyword levels, which creates better direction for optimizations and cutting unprofitable areas.  

Calculating ROAS

The formula for ROAS is:

(Revenue – Cost) / Cost

The real question is: “What is a good ROAS?” Unfortunately, this is going to very specific to individual clients, and can vary drastically. A 2.0 ROAS can be great for one account, yet be considered a complete failure for others.

Setting Up ROAS In Google  

In order to see revenue numbers within AdWords you will need to become familiar with the term “conversion value”. Conversion value is the revenue from each conversion, and, with a tiny bit of editing, it can be added to the conversion tracking code placed on the website. If every conversion results in the same amount of revenue, edit the conversion value within the code to match the value. This is a static conversion value.  For example, if every purchase results in $25 of revenue, the conversion value will equal 25:

var google_conversion_value = 25;

There is the option of having Google generate the conversion code with the appropriate value.  You can edit the settings of an existing code or, when generating a new conversion code, choose the appropriate conversion value. Within the new code, you should see the change in conversion value outlined above.

screenshot 1

However, if each conversion results in a different amount of revenue, depending on the product purchased, a dynamic tracking code will be needed. Dynamic tracking codes cannot be generated automatically.

if (<%= totalValue %>) {   var google_conversion_value = <%= totalValue %>;   }

In most situations, the code above will need to replace the typical conversion value part of the tracking. This dynamic variable will vary, depending on the shopping cart that is used. When creating the dynamic variable, there will be the option to track either the order subtotal or the total, which includes shipping and taxes.  Tracking at the subtotal-level is often recommended.

screenshot 2

However, this can vary from website to website. You can see additional specifics from Google, here.

Using ROAS

Prioritize! Let’s pretend I own an office supply company. It’s pretty obvious that selling a pencil won’t be as profitable as selling a printer.  By using ROAS as your metric of choice, you can prioritize how much volume is needed to be profitable, and where to focus your time and spend.  The practical application of this knowledge is that you can determine to pay more for a conversion, if the return is greater. This is one of the reasons that CPA goals do not always work for eCommerce accounts.

It is also important to recognize revenue that results from your search funnels. If your product results in a lot of research before purchase, it’s good to double-check your search funnel conversion value, especially before you begin cutting traffic.  This is available under ‘Customize columns’ and ‘search funnels’.  The chart below comes from an account with a product that costs over $1,000— a larger purchase with a typically longer sales cycle.

screenshot 4

You can see above that the highlighted campaign has click-assisted conversion value similar in size to the actual accredited revenue. While I wouldn’t recommend solely optimizing by click assisted conversion value, it is beneficial to occasionally consider the research stage of a purchase. Let’s also address ROAS in lead generation accounts. While ROAS in lead-gen might not give you immediate action items, it will give you an idea of lead quality and should be reviewed on a regular basis. ROAS is a great metric to judge performance of a single channel for both eCommerce and lead generation.  I could relist all the other great things about using ROAS as a metric for your campaign, or I can simply direct you to great posts that came before this one:

o   Simplest Way to Change Bids Based On ROAS

o   How To Increase ROAS For Your PLA Campaign 

o   How Keyword Research is Tanking Your ROAS

What are your thoughts regarding ROAS in eCommerce accounts? Please leave your comments below.