I always loved math in elementary and middle school. In high school, I got into fantasy sports and spent way too much time analyzing stats and matchups, just as ideas like Billy Beane’s sabermetrics were emerging and becoming more popular. These days, my colleagues know I’m as likely to discuss marketing strategy with clients as I am to delve into data (maybe a bit too much). While not everyone shares my enthusiasm, I’m definitely not the only one fascinated by numbers and data anymore. The marketing world is fiercely competitive and revolves around data. In paid search, we constantly strive to enhance key metrics like Quality Score, click-through rate, and cost per conversion. However, we often fixate on these basic metrics and miss the bigger picture. Return on ad spend, or ROAS, provides that broader perspective. It reveals not only what drives conversions but also the revenue generated by those conversions. By the end of this article, you’ll understand:

• What ROAS means for digital marketers
• How to calculate ROAS using a simple formula
• Why ROAS surpasses CPA
• How to use conversion value to calculate ROAS
• How to optimize your Google Ads account for ROAS

What is ROAS?

ROAS stands for return on ad spend—a metric that quantifies the revenue generated for every dollar spent on advertising. Essentially, ROAS is synonymous with return on investment (ROI), where your digital advertising expenditure is the investment. Fundamentally, ROAS gauges the effectiveness of your advertising. The more effectively your ads resonate with potential customers, the more revenue you’ll earn per advertising dollar. Higher ROAS is always better. You can measure ROAS at various levels within your Google Ads account: account, campaign, ad group, and so on. As long as you know your spending and earnings at that level, you can calculate ROAS.

Calculating ROAS: A Simple Formula

Despite its significance, ROAS is surprisingly easy to calculate. The formula is incredibly straightforward: ROAS equals your total conversion value divided by your advertising costs.

“Conversion value” represents the revenue earned from a single conversion. If a $20 ad spend leads to the sale of a $100 product, your ROAS is 5—for every dollar spent on advertising, you earn $5 back.

Why ROAS Outperforms CPA

Conversions are not equal. As marketers, we must define conversion actions that accurately reflect successful advertising outcomes. Cost per conversion (CPA) is commonly used to evaluate paid search campaign success. While useful for measuring conversion volume, it only reflects the average cost per action. Consider the two ad groups below.

Both spent $100 and yielded one conversion, resulting in identical $100 CPAs. However, the value of those conversions differs significantly. One ad group generated $50 from the $100 spent (ROAS of 0.5), while the other generated $300 (ROAS of 3.0)—a substantial difference for the same investment! A ROAS below 1.0 indicates a loss, as you’re earning less than you spend. The 3.0 ROAS demonstrates that for every dollar spent, the ad group generated $3 in revenue (a 200% return). Profit-driven strategies aim for the highest possible ROAS. While profit margins vary by industry, common benchmarks typically fall between 3.0 and 4.0, making these figures the benchmarks to reach and surpass.

Using Conversion Value to Calculate ROAS

To measure and view ROAS in Google Ads, assign conversion values to your conversion actions. This can be a fixed value for each action or a dynamic amount tied to specific transactions. For e-commerce, setting up dynamic conversion values is often simple. Many shopping cart platforms streamline this process, requiring minor website code modifications to include transaction-specific values with each conversion. For non-e-commerce businesses lacking transaction-specific values (like lead generation campaigns), a manual or fixed calculation is necessary.

This involves considering post-conversion metrics, such as lead-to-customer conversion rates and the average customer lifetime value. For example, let’s say your lead generation efforts have a 10% close rate, and each customer generates $5,000. Multiplying these values gives you a conversion value of $500. In this case, a $500 CPA translates to a 1.0 ROAS; $250 CPA to a 2.0 ROAS; $166.67 CPA to a 3.0 ROAS, and so on. Instead of using dynamic, conversion-specific values like in e-commerce, assign this $500 flat value to lead generation actions (e.g., form submissions) to allow Google Ads to calculate your ROAS.

Optimizing Your Google Ads Account for ROAS

With conversion values in place, you can start optimizing! When analyzing campaigns, ensure you have sufficient data (at least 100 clicks per campaign) before making decisions about campaign or ad group segmentation. Seasonal trends or short-term changes may require larger datasets. Segment your account and campaigns by specific offerings or closely related groups. Whether Search or Shopping campaigns, organize products and services to achieve a balance between volume and return. Consider the account below.

The highest-spending campaign has the most conversions but also the lowest ROAS. Here, the advertiser should investigate the high-spending campaign:

• Keywords with high spend and no conversions
• Search terms leading to conversions
• Irrelevant negative keywords
• Budget monopolization—an ad group, keyword, or related set consuming a large budget with low returns Bidding on search queries with sales-related intent (e.g., “buy,” “shop,” “online,” “sale,” “cheap”) can improve conversion rates, even if their broader counterparts have higher search volumes. Specificity and intent in keywords can be highly beneficial! In this example, splitting the large, inefficient campaign into more targeted and contextual campaigns or ad groups should lead to better returns!

Since other, lower-spending campaigns are already segmented for higher returns, focus on optimizing the large, inefficient campaign using the strategies above. Monitor your impression share to ensure new, efficient campaigns aren’t limited by the inflated budgets of less efficient ones. Now, let’s delve into the details. Optimizing your account goes beyond analyzing search queries and budgets. Consider your target audience and review demographic metrics. Do customers visit your site multiple times before converting? Add website visitors as an observation audience with a positive bid modifier. Do you have repeat customers? Add a customer list audience as an observation audience with a positive bid modifier. You could even create separate RLSA campaigns with audience targeting instead of observation!

Tip: Review your attribution model

Explore attribution models beyond the default Last Click, including single-touch and multi-touch models. Each offers a different perspective on what influences conversions. Branded campaigns often have high ROAS because customers searching for your brand name are likely ready to purchase or inquire. However, you might miss what led them to your site initially. Perhaps a general, top-of-funnel search term initiated their journey. Those keywords might be more valuable than they appear with last-click attribution. Experiment with different models for a clearer picture. For products or services with longer sales cycles, a multi-touch model with extended conversion windows can provide valuable insights. Partial conversion data will reveal which keywords are influencing conversions. You can learn more about multi-touch attribution here.

ROAS & Google Shopping Campaigns

Shopping campaigns, which primarily use product feeds instead of keywords, differ slightly from search campaigns. Segment your product feed effectively into distinct campaigns and ad groups, using exclusions for irrelevant products. This allows you to optimize Shopping campaigns for ROAS and even employ Target ROAS bidding with sufficient conversion volume.

Like search campaigns, leverage negative keywords in Shopping campaigns to filter out low-performing queries and structure them for a stronger ROAS. Shopping campaigns, with their prominent image-based ads, often boast strong conversion rates and lower costs per click than text ads. Consequently, well-structured Shopping campaigns can consistently deliver conversions and excellent ROAS.

Review Your Account

If you haven’t overdosed on math, numbers, and revenue, I encourage you to analyze your account through the lens of revenue and profitability. ROAS is not limited to e-commerce. Both lead generation and e-commerce marketers benefit from using ROAS to make informed, profit-driven decisions.

Remember that benchmarks are guidelines. Evaluate your products or services to determine the appropriate margin and the necessary ROAS for your conversion actions and campaigns. Armed with this knowledge, you’re equipped to interpret ROAS data and optimize your account effectively. While campaign goals may vary, the ultimate objectives remain constant: increasing profits and growing your business.