ROAS vs ROI in PPC? Look'n Learn How to Calculate it in Less Than 7 Minutes.
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One of the biggest challenges that marketers and advertisers face is related to proving the return on investment on the campaigns they run. Proving marketing ROI is the second biggest global challenge faced by marketers. When running an ad campaign, Return on Ad Spend (ROAS) happens to be a vital metric that you have to calculate to prove the ROI of the campaign.
The ROAS is used to calculate the effectiveness of an ad campaign and is one of the core metrics that helps advertisers prove ROI.
Understanding, calculating, and improving ROAS are the primary tasks that you have to perform if you are spending money on PPC ads. This in-depth guide covers everything you need to know about ROAS, how to calculate ROAS, and how to improve it.
What is ROAS?
Return on ad spend or ROAS is used to measure return on the amount spent on advertising. It measures how much you made for each dollar you have spent on advertising. In simple words, ROAS measures return on advertising specifically.
For example, if you have spent $100 on advertising, and your campaign resulted in $150 worth of sales. Your ROAS will be $1.5 meaning you earn $1.5 for every single dollar you spend on advertisement.
ROAS helps you measure the effectiveness of your ad campaigns and lets you identify best ad networks, ad groups, and advertising methods. Higher ROAS is desirable as it means you are earning more per dollar investment.
Here is how ROAS is calculated:
ROAS = Net Revenue generated by ads/Ad cost
The output is a number that shows you how much you will earn for spending $1. It is essentially a ratio between revenue generation and cost of the ad. ROAS between 3 to 4 is considered good and it varies greatly between industries. Without a doubt, the higher the ROAS, the better.
You can measure ROAS easily if you know how much you are investing in ads and how much you are earning from these ads.
Why ROAS Matters
ROAS is an important metric that tells you a lot of things about your advertisement at all levels. It is a realistic and reliable metric that shows the profitability of your PPC campaigns and advertising networks. You can measure ROAS of your entire business, individual ad campaigns, ad groups, ad networks, and for each ad.
ROAS is a better measure of return as compared to CPA as it focused on revenue generated and not just conversions. Cost per action or cost per conversion is one of the most used metrics (especially in the affiliate industry) that is used to measure the return. It uses conversions to track return on the advertisement.
ROAS, on the other hand, uses revenue generated by the advertisement which includes recurring revenue too. Thus, ROAS includes customer lifetime value too and it is a more robust metric. For example, a visitor clicked your ad and converted. He later purchases a product and then after two days, purchases another product. These two sales will be credited to the ad revenue.
Also, ROAS accounts for all types of advertising costs – not just the campaign budget. It includes administrative costs, vendor costs, ad partner or agency cost, affiliate commission, cost of tools, and other direct or indirect costs associated with running and managing ads.
This makes ROAS an effective metric that gives you a quick and instant overview of your PPC campaigns that you are running, and you can identify best-performing ad campaigns based on revenue (as opposed to an arbitrary metric).
How to Calculate ROAS
Enough about the return on ad spend and its benefits, let’s talk about ROAS calculation.
You need two things to calculate ROAS:
- Revenue generated by ad
- Cost of running the ad
Let’s see how you can find these two variables.
1. Revenue Generated by Ads
Revenue generated by ads can be difficult or complex depending on your business model, ad network, attribution model, conversion treatment, and other variables. Calculating revenue generated by specific ads or ad campaigns is a whole different story as it involves deep campaign and ad group level calculations.
If you run an ecommerce store, calculating revenue becomes easier as you aren’t dealing with conversions. You work directly with sales and this makes revenue calculation straightforward. However, if you are in a B2B sector where you generate leads, and then it takes a certain time to close those leads, calculating the revenue generated by ads gets complex. Businesses that focus on conversions must consider post-conversion metrics to calculate the revenue generated by ads.
Leading ad networks like Google Ads and Facebook Ads lets you calculate ROAS easily irrespective of your business model. Google Ads, for example, lets you create conversion values in your Google Ads account for automatic calculation of revenue generated by ads and ROAS.
Conversion value is a numerical value that is used to determine the impact of a conversion on your business. Not all conversions have a similar impact on your business and revenue. Some value more, others carry less value. By setting conversion values in Google Ads, you can identify high-value conversions that result in a high ROAS.
You can assign the same value to all the conversions or dynamic transaction-specific values in the Google Ads. Follow these steps to assign conversion values:
Step #1: Sign in to Google Ads
Click here to sign in to your Google Ads account to get started.
Step #2: Measurement
Once you are logged in, click Tools & Settings > Measurement > Conversions:
Step #3: Click Add
Click the + sign to add a conversion value:
Step #4: Conversion Tracking
Select an appropriate conversion tracking for your business. In most cases, it is your website where the conversion takes place. You can also track conversions on apps and phone calls. Or, you can import data from Google Analytics or any other source.Click Website to start tracking conversions for your website:
Step #5: Add Conversion Value
You'll be asked to select a category for your conversion. Select an appropriate category from the dropdown menu:
It includes both sales and leads categories to make conversion tracking easier.
You'll then be asked to set a value for your conversion. You can use the same value for each conversion or different values:
You’ll have to assign different values if you sell multiple products. In this case, assign a default value and the rest will be handled by the tracking code:
Step #6: Attribution Model
An important part of ROAS is your attribution model. Move towards the end to select an appropriate attribution model. The last click is the default model that’s selected. You can change it to first click, linear, time decay, or position-based:
Once you are done, click Create and Continue.
Step #7: Add the Tag
You need to add the conversion value code on your website. You can install the tag yourself, email it to your developer, or use Google Tag Manager:
You'll need to add global site tag and event snippets to make conversion tracking work for your website. Here is a quick guide on how to do it.
Once you have successfully set up the tag and conversion values, you'll be able to conversions, cost/conversions, conversation rate, and ROAS in the Google Ads account:
This makes it super-simple to identify best campaigns based on ROAS. You can then tweak your campaigns accordingly and increase the budget for campaigns and ad groups with higher ROAS.
Google Ads lets you analyze ROAS for ads, ad groups, and campaigns. You can check specific details at the ad level and see what’s working for you.
Static Vs. Dynamic Conversion Values
Calculating and tracking ROAS for your Google ad campaigns require you to set appropriate conversion values. These values are used for ROAS calculation. Google Ads lets you add two types of conversion values:
- Static values that remain the same for all the conversions
- Dynamic values are different for each conversion.
You need to set up conversion values correctly to calculate accurate ROAS. Setting an incorrect conversion value here or in the tag will result in an appreciated or depreciated ROAS without you having any idea of it.
It is, therefore, essential to understand what you are doing and how to set up these values correctly.
Static conversion values are used when all the conversions have the same value. This only happens for lead generation where you don’t sell anything or there isn’t a shopping cart. For example, if you are sending traffic to a landing page where visitors have to fill a form and convert. In this case, you'll use a static conversion value because all the visitors have the same conversion value.
Dynamic values are transaction-specific and are used in all the cases where you sell products or generate leads that have different prices and values. For example, shopping cart value could vary depending on the product variations selected by the customers on an ecommerce store. This is a case where you'll select dynamic values.
In case of lead generation or in cases where identifying a specific conversion value isn’t possible, things get complicated. For example, if you are generating leads for your B2B marketing agency via Google Ads, you'll not have any idea of how each lead converts. You could end up having a $5K project with one client and a $70K project with another client.
In all such cases, assigning specific conversion values gets complicated. If you have a sophisticated sales process and you are using a powerful CRM tool, you can assign an average conversion value to leads based on historical data and put it in the static value section.
2. Cost of Running Ads
Setting up conversion values in Google Ads provides you with ROAS based on the cost of running ads. This gives you a good idea of how to channelize your advertising spend. But this cost only includes ad-related costs that aren’t documented with Google Ads.
When you run an ad, it involves a lot of costs such as:
- Vendor, agency, and partner costs
- Cost of tools
- Miscellaneous costs
In order to make ROAS reliable and accurate, you need to adjust these costs too. For example, if you have a team of 3 employees working in the advertising team who manage and run ad campaigns, you have to adjust their salaries too.
Similarly, there are other costs associated with running ads that must be accounted for.
Let’s take an example.
Your business has a ROAS of 5 – quite healthy. This means you earn $5 for every single dollar you spend on ads. However, you haven’t adjusted ROAS for the advertising team salary that costs you $5000 per month. Your business invested $5000 in ads a month and earned $25,000. The total revenue earned from advertising turns out to be $20,000. However, the actual net revenue is $15K ($20,000 - $5000).
Reporting $20K as advertising revenue in financial reports will lead to problems as it is assumed that it accounts for all the costs of running ads (from a financial viewpoint).
This is a big concern from the reporting viewpoint, and it impacts your ROAS significantly.
These additional costs of running ads must be accounted for to adjust ROAS so it is more realistic and effective. Not adding these costs decline the effectiveness of ROAS significantly.
However, these additional expenses aren’t considered by most businesses when calculating ROAS. You can stick with the ROAS from your Google Ads account. It all comes down to your financial strategy. But it is recommended to add these costs too to increase the effectiveness and reliability of ROAS.
How to do it?
It’s simple. You have to calculate an adjusted ROAS based on ROAS data from your ad account. Copy data in an Excel sheet and add additional costs, and you'll have an adjusted ROAS that will be more authentic.
This will require additional (manual) work at your end but it is worth the effort. Your ROAS will make more sense and it will show you the actual net revenue you are making from running ads.
Click Fraud Adjustment
PPC click fraud is often an overlooked phenomenon that businesses and advertisers don’t consider when calculating ROAS. Fraudulent clicks ruin your ROAS and it will be no more a relevant metric. When 15% of all PPC clicks are fraud, you have to take preventive measures to keep your ROAS safe from PPC click fraud.
ROAS depends on the cost of running ads. When you receive a lot of fraudulent clicks for a specific campaign, the cost will increase resulting in a reduced ROAS. Google charges you based on clicks even if you have optimized your campaign for ROAS. The charging is based on the impressions or clicks, and both are subject to click fraud.
Google maximizes the CPC for ROAS bidding to increase conversion value to reach your target ROAS. Setting maximum CPC means you'll be paying a very high price per click to achieve your ROAS target. This means you'll be paying for fraudulent clicks too if you aren’t using a click fraud protection tool.
In order to achieve a realistic ROAS for your campaigns, you have to use a PPC click fraud prevention tool. Not only will such a tool help you get an accurate ROAS ratio, but it will significantly reduce your advertising cost.
Imagine, you are paying an average CPC of $0.75 for an ad campaign and you aren’t using a fraud prevention tool. According to the industry standard, 15% of all clicks you are receiving are fraudulent. The cost of 100 clicks, in this case, will be $75 and 15 clicks on average will be irrelevant resulting in low conversions. Reduction in conversions leads to low conversion value leading to a reduced ROAS.
Not treating for fraudulent clicks impact ROAS in two ways:
- It reduces conversion value
- It increases cost.
The impact of click fraud on ROAS is more than you can imagine as it impacts both the variables that are used by Google Ads to calculate ROAS. Here is the formula used in Google Ads:
In the presence of click fraud, the numerator value is reduced, and the denominator value is increased having a significantly higher impact on ROAS.
A Google Ads click fraud detection and prevention tool is a must if you want to get a realistic and reliable ROAS for your campaigns. A click fraud prevention tool like ClickGUARD doesn’t just make ROAS accurate but it improves the overall effectiveness of your advertising campaigns.
Return on ad spend is a powerful metric that provides you with a lot of useful information about your advertising campaigns. You can channelize your advertising budget by investing money into ad campaigns with the highest ROAS.
Calculating ROAS needs special attention. A wrong calculation might put you in trouble as you'll end up investing money in an underperforming ad campaign. Two things that need to be considered exclusively. First, add all types of ad costs to calculate an accurate ROAS. Second, use a click fraud detection and prevention tool as PPC fraudulent clicks reduce ROAS significantly by increasing ad cost and reducing ad revenue.
Remember, ROAS is the most trusted metric to measure advertising effectiveness. Make sure you are calculating it right.