Is ROAS or CPA Better for Your Account?
April 14, 2014
Cost per conversion (CPA) and return on ad spend (ROAS) are the two primary performance KPIs. These two metrics not only allow you to examine account health from a high level but make decisions at the keyword level as well. Despite their importance, it is not uncommon to find advertisers who are not sure which one to use.
Cost per conversion is the staple metric for lead generation. Simply divide the total cost by the number of conversions to calculate the CPA.
Why does this matter though? To start, CPA directly relates to your business goals and performance. Given a certain sales closing rate, you can back track just how much you can pay for each conversion to balance with the revenue driven by sales.
In this example, each lead has a potential value of $5,000 per deal. You expect about 2% of your leads to convert to customers. If you aimed for a perfect balance you could potentially spend,
$5,000 in spend X 0.02 closing rate for leads = $100 cost per lead
Now that you have a break-even point, you simply have to keep your CPA below this number. You can further tweak this by using a lifetime customer value to help adjust this figure for subscription models.
Additionally, knowing your maximum CPA allows you to know just how far you can push for extra conversions. There are going to be times when you simply can’t hit the target goal for either conversions or CPA. Of course you want to keep your sales funnel full so you continue to push advertising just a little further. CPA then functions as a reference for understanding just how much extra you are paying for these additional conversions, allowing you to decide if the increase is worth it.
ROAS and all of its variations are simply the amount of revenue you generate in relations to your advertising costs The most straightforward is revenue divided by cost. This metric explains how much are you receiving in revenue for each dollar spent on advertising.
ROAS makes it much easier to evaluate your account alongside the variable purchase totals commonly found in e-commerce. Rather than calculate a CPA goal, you simply focus on achieving a certain ratio. This makes the metric more flexible and allows you to ignore the cost per conversion, which will heavily vary between products.
For example after accounting for fixed costs in producing/acquiring the products you know you can’t spend any more than an additional 20% on advertising costs. You could then back track this into a 500% return on ad spend. If its easier to understand, some advertisers use cost/sale as well, the inverse of ROAS.
Consider two keywords, one has a CPA of $20 but a revenue of $100 and the second has a CPA of $30 but a revenue of $150. Both keywords have the same ROAS but if you focused too heavily on CPA you might be tempted to bid down on the second keyword.
As a second example, if you try to balance the CPA against the price of a single item, you may neglect the fact that your typical buyer spends an extra 20% on the purchase of accessories. By bidding based on a single item’s price, you could cut off additional revenue by being less competitive on these now undervalued terms.
Which One Should You Use?
CPA is the way to go if you have a fixed cost/fixed pay out model. This makes it great for lead generation but potentially misleading for e-commerce. ROAS is the way to go if you have revenue heavily varies between purchases. This makes ROAS great for e-commerce but makes it much less useful for lead generation. Does this mean you have to choose one or the other?
Despite focusing on CPA, you could use ROAS as a side metric for emphasizing the value of PPC for a lead generation account. If you are ever in the situation of defending PPC, you may explain “not only did we bring in X amount of leads at this budget but it resulted in $Y in sales, for every dollar invested in PPC we are seeing a Z return”. You will have to utilize other metrics but it provides a nice change of perspective from the standard “we had X number of leads at a Y CPA”.
E-commerce relies on ROAS and marginalizes CPA. That said, you could get a rough estimate of CPA by average order values. If you need to hit a 400% ROAS and your average order is $100, your CPA should be somewhere around $25. While this muddies the waters when it comes to comparing many different products, it can be used as a heuristic for specific product groupings that have similar prices and buyers.
Having a reference CPA in e-commerce won’t help you maximize your account but it makes it easier to spot potential issues in the account. You’ll just have to watch out for a changing average order value or you may find yourself caught off guard.
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