Let’s talk about a critical topic that can transform your Google Ads campaigns: setting the right ROAS target to maximise your profits.
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Setting the Right ROAS Target in Google Ads
In this newsletter, I will teach you how to set the right ROAS target in Google Ads. By "right," I mean the one that actually maximises your profit. Missing this key element can cost you significant sums annually. If you run ecommerce Google Ads, nailing your ROAS target is the single most powerful thing you can do to maximise returns.
Questions From a Friend
This topic came up because a friend asked me:
The common questions are:
- Is my ROAS target too high?
- What's the typical ROAS for other ecommerce advertisers?
- What's the right ROAS target, and how do I figure it out?
I realised these questions are frequently asked, so I decided to write this newsletter to help as many people as possible.
Hitting ROAS Targets Is Easy
Hitting any ROAS target you want in Google Ads is easy. Whether it's 300%, 500%, or 1000%, Google Ads makes it achievable with some basic knowledge and training. However, the higher your ROAS, the fewer clicks and conversions you'll get, potentially reducing your overall revenue.
The Google Ads system responds logically to changes in cost per click bids. If you want a 10% higher ROAS, reduce your cost per click bids by 10%. The relationship isn't always exact, but it’s close.
When using a Target ROAS bid strategy, Google still charges per click. Increasing your Target ROAS decreases your cost per click bid, resulting in fewer clicks but higher ROAS. Therefore, you shouldn't aim for the highest ROAS possible, as it can limit your potential clicks and sales, making you less money overall. Instead, you should perform a simple test to find the ROAS target that maximises your profit.
What's the Average ROAS for Ecommerce?
While average ROAS figures can vary widely, many of my clients typically aim for between 300-500% blended account average ROAS. Some go above 1000%, and others deliberately run below 200% due to factors like higher lifetime value (LTV) or branding benefits.
To determine the right ROAS target for your business, follow these steps:
1. Calculate Your Break Even ROAS.
2. Understand the ROAS Sweet Spot.
3. Conduct Sweet Spot Testing.
1. Calculate Your Break Even ROAS
First, calculate your break-even ROAS to know your baseline for profitability. Here's how:
1. Determine your gross profit margin as a percentage.
2. Divide 1 by your gross profit margin percentage.
For example, if your gross profit margin is 40%, convert it to a decimal (0.4) and divide 1 by 0.4, which equals 2.5. This means you break even at 2.5x ROAS (250%).
2. Understand the ROAS Sweet Spot
Next, understand your ROAS sweet spot, where you maximise profit. Here's what the curve looks like:
The green line represents your gross profit. As ROAS increases, profit rises up to a certain point, after which it declines. The blue point is your break-even ROAS, and the yellow point is your ROAS sweet spot. Stay between these points to maximise profit without compromising on sales volume.
3. Conduct Sweet Spot Testing
To find your sweet spot, test different ROAS targets over several months. Document the results to determine which target maximises profit. For example:
As you can see, the gross profit peaks at 400% ROAS. Testing further might refine this target, but focusing on the optimal target allows you to maximise profits and then shift attention to other business areas.
Setting the right ROAS target is crucial for maximising profit in Google Ads. By calculating your break-even ROAS, understanding the ROAS sweet spot, and conducting thorough testing, you can find the optimal target for your business.
Remember, the goal is to maximise profit, not just achieve the highest ROAS. Take the time to test and adjust your targets, and you'll see a significant impact on your bottom line.