You have a meeting with the CEO. He wants to know how well the money tossed into paid online advertising is working.
You – “Well, ah, our Return On Ad Spend is 100%.”
CEO – “Great! Keep up the good work. Lets double the budget and give you raise.”
Sounds great right? Yes, it does sound great. Question –
Do you know how much profit you’ve returned when your ROAS is 100%?
Zero. Zip. Zilch. Natta. Nothing.
Still sound good? It must sound good to Google. On September 8th, 2014 they quietly announced they would be replacing ROI (Return On Investment) and Margin with ROAS (Return On Ad Spend) within the Adwords reports in Google Analytics.
You’ll find the GA AdWords reports in the Acquisition section: Acquisition > AdWords; then select “Clicks” on the Explorer tab to see the new ROAS metric. Note that you need to have Ecommerce enabled to see revenue data in GA. You will also find ROAS replaced ROI and Margin in the beta Cost Analysis report in GA (Acquisition > Cost Analysis).
ROAS vs ROI
So what is ROAS, how does it differ from ROI or Margin, and why does Google think it’s a more useful metric for advertisers?
ROAS or Return On Ad Spend = Revenue / Spend (or Cost) x 100
Example: You spend $800 per month for an AdWords campaign. You return $1,000 in Revenue. 1000/800 x 100 = 125% ROAS
ROI or Return On Investment = Profit (Revenue-Cost) / Cost x 100
Example: Using the same figures 1000-800 = 200; 200/800 x 100 = 25% ROI
Margin = Profit (Revenue – Cost) / Revenue x 100
Example: 200/1000 x 100 = 20% Margin
Which is the best to use for PPC advertising and why has Google switched to ROAS and made ROI and Margin not available?
ROI and Margin have been around for quite some time and are widely used. ROAS is a newer calculation, at least in the digital advertising world.
I never use Margin much for a PPC advertising metric, though it’s used extensively in the retail industry, products, and accounting. I prefer using ROI as a PPC metric as it seems pretty straight forward. There are several ways you can look at profit which will effect your ROI and Margin calculations. You can go deep into profit and figure out exactly what your costs are, not just your advertising cost.
So what is your actual profit per sale? Taking a lot of factors into play, then subtracting your Ad cost, to find your real profit. I think maybe this has been one of the gripes about ROI recently, these inconsistent calculations. But as long as you stay consistent with your metrics, you can compare your improvements and plan accordingly. Isn’t that why we track metrics in the first place?
I do suggest you have a good idea on how much actual profit you make from an average order. You just don’t need it all figured out to a tee to make good decisions with pay per click advertising.
You don’t need to break it down on a per unit or per order basis, but if you know your average order value you should be able to figure your average profit per order. Keeping that figure in mind, you just want to ensure your PPC CPA (Cost Per Acquisition) doesn’t out weight your Average Profit Per Order. But that’s another discussion and a different set of metrics we’ll need to tackle another time.
For simplicity I suggest just using your AdWords cost in the ROI (or Margin) calculations for weekly and monthly reports (that’s how Google calculated it within GA, when it was available). Then, if you want to get deep into real profit. Do some further calculations every quarter or so just to ensure your other costs haven’t gone out of whack. Now, back to ROAS.
Is ROAS a Useful PPC Metric?
I’m not sure why Google made the switch to ROAS over ROI. At first glance it only sounds good but doesn’t give you a good, quick comparison on how well your AdWords campaigns are performing.
Going back to that meeting with the CEO and using similar figures from the examples above. If you spend $800 in AdWords and return $800 in revenue your ROAS is 100%. We have been taught for a long time that 0% is Zero, 100% is Everything, and anything higher is Superb!
So why switch now? Just to make it seem like if you spend all the money you bring in back into Ads that it’s ok? Sounds good for Google, but NOT for Advertisers.
Yes, of course there are many other factors you should be looking at with any advertising medium: Attribution, Impressions, Branding, Buyer Stage, Repeat Sales, Word of Mouth Sales, Customer Lifetime Value… But also think back to your actual cost and actual profit. Factor that into your ROAS and you may be in for some more disappointing results.
Another disappointment I have with the ROAS switch is the comparison of future reports to past reports. Now you’re trying to compare ROAS to ROI, apples to oranges. If you’ve been using ROI as a metric in your reporting as I have there is help. The good thing is, you may have already noticed, ROI is just ROAS minus 100. So instead of exporting new spreadsheets for months of past reports, you can just add 100 to ROI and now your comparing apples with apples.
A Better Way to View ROAS
When looking at ROAS as it’s standard percentage, I typically just loose the 1, and there you have your ROI. But preferably like to review ROAS as a dollar figure. So in the above example ($800 AdWords spend, $1,000 in Revenue 1000/800 x 100 = 125% ROAS), I like to loose the percentage so it’s a decimal number 1.25, or $1.25. Which means for every dollar we’ve spent, we’ve received $1.25 back. Now that is return on ad spend.
I still prefer ROI. But we have to use the tools and metrics that are readily available and it looks like ROAS has replaced ROI, at least in the default GA reports. You can always export your data and calculate any metric you like. One good thing may come of it, another bidding strategy. In AdWords, you can now select a bid strategy based on ROAS called Target ROAS.
If you know how to calculate these metrics you will know what to expect. If you dig deeper into your data you can find your real cost and profits. And as long as you stay consistent with your metrics you should have good analysis and will make more accurate decisions to improve your AdWords or Pay Per Click Advertising campaigns.
I’m interested to hear your thoughts on ROAS vs ROI in the comments and whether you think it is a useful metric for your PPC campaigns.