Move Past ROAS And Think ROI
September 25, 2014
This week we’ve been discussing PPC challenges we’ve faced and how we overcame them. Having worked primarily with eCommerce accounts, I’ve come to understand that revenue and return need to be reviewed beyond face value in order to determine if a PPC program is truly profitable.
In any PPC campaign, whether eCommerce or lead generation, return is the ultimate indicator of success. In other words, how much money did I put into my PPC account and how much did I get back. However, the notion of how to calculate “return” is often times defined differently.
Let’s look at the two primary methods for calculating return and play out a scenario.
Return On Ad Spend (ROAS) – This method looks solely at platform ad spend and associated revenue. For example, if I spend $1,000 in Google and make $5,000, my ROAS is 400%. The formula I use is revenue ($5,000) minus cost ($1,000) divided by cost ($1,000). I then multiply by 100 to get 400%.
Return On Investment (ROI) – This method includes any additional fees in the calculation. For example, the management fee may be $500 while overall product margins are 50%. Revenue now becomes $2,500 (.50 multiplied by $5,000) while total cost is $1,500 ($1,000 ad spend plus $500 management fee). So when we run our formula of revenue ($2,500) minus cost ($1,500) divided by cost ($1,500) and then multiply by 100, we see an ROI of 66.7%.
In this scenario, ROAS looks much better than ROI, but we know that this metric is misleading. In fact, when presenting solely ROAS, clients tend to ask if the equation includes management fees and margins. As PPC Specialists, we need to manage our accounts knowing that ROI is much more important than ROAS.
OK, But How Does This Thinking Impact My Management?
Whether the primary return metric is ROAS or ROI, we are always striving to make accounts more profitable and efficient. In this sense, no matter the metric, the goal is to show the best results. But you can adjust your thinking to look at account management from an ROI perspective.
Classify Campaigns and Products Accordingly
On an ongoing basis I ask for product margin information. Whether this information is provided at the product or category level, it gives me a good basis for how to proceed. Along with client feedback, I tend to create campaigns around the highest margin and top selling products. By prioritizing this way, I’m able to bid accordingly. For example, I would bid higher on a $100 product with a 40% margin vs. one with 20%.
There will always be caveats. Maybe the average cost per click of the product with a 40% margin is $10 while the 20% margin product is $2. Or, it may make sense to bid higher for a specific product, even if the return will be negative because the customer has a greater chance of purchasing again. Perhaps the target ROI can be lower in these types of campaigns. These are all items that will need to be discussed, but the important point is that they are being referenced in regard to ROI.
This philosophy is especially helpful when running Shopping campaigns. By utilizing any of the various attributes, products can easily be emphasized, given lesser weight, or excluded all together. Top margin and sellers can be given their own campaigns (and higher bids) so traffic is funneled correctly.
Even with remarking, there is the potential to hit higher value audiences through minimum thresholds.
If I Only Target A Higher ROI, Won’t I Miss Out On Some Conversions?
The major downfall of looking at an account from strictly an ROI view is that we may lose potential conversions. More so, we may miss out on campaign expansion opportunities that might lead to more profitable conversions. Along with structuring campaigns by desired ROI, Dynamic Search Ad and All Product Shopping campaigns are useful.
Both of these campaign types act as explorers where CPCs are extremely inexpensive. For example, my highest DSA bids tend to be no more than $0.20. I know that I’m going to bring in some irrelevant traffic and that my conversion rate will be low, but I’ll also have a low cost per conversion. And even though some conversions will be of low order value, the inexpensive CPCs should still allow for a good ROI.
ROAS is a flawed metric that doesn’t accurately gauge account performance. ROI needs to be the primary return metric as it more accurately reflects the total investment in a PPC program. Even if every decision isn’t based solely on ROI, this metric should be the backbone upon which account success is determined.
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