May 13, 2014
One of the biggest hurdles for new e-commerce managers is learning to optimize bids based on ROAS. In training we are exposed to all the metrics native to AdWords but aren’t always exposed to utilizing revenue (besides more is good). Thankfully it’s really easy to explain this simple method. Let’s jump on in!
Setting the Scene
There is nothing quite like starting an article with an assumption. Despite that fact that making assumptions supposedly makes an a… well you get the point. I’m going to do it though, just keep reading, you’ll see.
I assuming you’re a fresh-faced PPC manager faced with a new e-commerce account. You’ve dealt with lead gen before. You grew up on it. You don’t even flinch in the face of CPAs anymore.
But now everything has changed. You are advertising a large inventory of products at different prices. You can’t naively assume that each sale is worth the same value anymore. How do you even manage the bids? Your palms are now sweating and you are contemplating the easiest way to retreat back to lead gen land.
Before you run away screaming and or crying, read on and we’ll dive into a straightforward, simple way to calculate keyword bids based on ROAS. Soon enough you’ll be changing bids like a pro and watching the money pile up. You could even say you’ll make it rain.
I expect many readers to stop right here after a comment like that, but only Analytics will tell. Let’s get serious now. The future of your bids is at stake.
What Is This ROAS Thing And How Does It Help Me With My Bids?
There is a little debate on this but I’m going to consider ROAS as Revenue/Spend. We’ll be using this throughout the article but you can substitute a different version if you’d like.
With an ROAS goal in mind you know the ratio of spend to revenue you have to hit to be a winner. Rather than balancing around a CPA goal, you’ll balance around revenue.
Getting back to the keyword bids. Each keyword generates a certain amount of revenue. By dividing the total revenue by clicks, you arrive at revenue per click. Assuming you have decent quality traffic, you can expect each click on an ad to average to $X in revenue. Think of it as an average order value for clicks.
Now you know how much each click is worth in the current conditions. How do you steer towards an ROAS goal? One way to do it is to simply increase or decrease your bids by a specific percentage, depending on how far away from goal you are. That is great for fine-tuning but what if you are in a situation where you are way off or this strategy is ineffective. I’ve seen situations were bids were so far off the mark that standard bid changes did nothing to help performance.
Is There a Better Way?
The short answer is simply divide the revenue per click by the ROAS goal. It’s not the most intuitive concept right off the bat, but bear with me.
ROAS gives you the ratio you need to achieve between your total spend and your revenue generated. Dividing the revenue per click by the ROAS does the same thing but at the keyword level. Rather than look at an aggregate data, you can use revenue per click to backtrack to how much you can pay per click.
If for some reason you need to look like you are doing math (or to make this a little more clear). Take out some scratch paper and Write RPC/ROAS. Now substitute revenue/click for RPC and revenue/spend for ROAS. Now you have (revenue/click)/(revenue/spend). Solve the equation and you end up with spend/click, which looks eerily similar to our old pal, CPC.
Is That It?
Yeah, kind of. I know I took nearly 600 words to tell you what I could have done in two. Sometimes the journey is what really matters though.
This is a great method for resetting those pesky bids that do nothing against intractable performance. In an inherited account, I put this in place and performance quickly recovered, despite lingering account pains. Sometimes it’s the simple changes that have the biggest impact.
This method is also a great starting point for making any bid changes. Once performance is stable, I like to use this calculation but put a cap on how much I’m willing to change the bid. For instance, I use an =if(), to cap the change at +-20%. You’ll also have to go back to blindly changing bids in situations where you don’t have revenue data.
If you really love to utilize ROAS, it is also a automated bidding strategy in AdWords. If you go that route, keep an eye on it though. You don’t want to algorithm bidding keywords down too low and lose crucial traffic.
How do you optimize for ROAS? There are many methods and this is one of the simplest. Feel free to chime in with any questions, suggestions, or complaints about the way I used ROAS.