Understanding Return On Ad Spend (ROAS)

Okay, I believe we are live. Just give me a moment or two, I'm just making sure everything is working fine and we'll get started. Okay. Okay, good afternoon, good morning, good afternoon, good evening wherever you are in the world. I hope you are keeping well and safe. My name is Uzair and in today's YouTube live stream I'm going to be talking about how to calculate your return on ad spend, which is called the ROAS and how to work out your maximum profitable cost per click.

So these metrics are quite important because you just can't keep on bidding up to rank higher in the auction all the time, because you will not be profitable. But before I get started, just a couple of quick housekeeping things, if you are new and here for the first time and you haven't been on one of these live streams, then a very warm welcome to you.

There's a chat box on the right hand side of your screen. If you have any questions, please put them in there and I'll do my best to answer them for you before we switch this off. And if you are returning, you know the drill and the format, fire away your comments and your questions and I’ll refer to them towards the end of the presentation.

So let's get started, I'm just gonna make sure that we are all good. The screen is working fine. Perfect. Alright, so ROAS is a very critical and important metric when it comes to running your Google Ads or any kind of paid advertising be it: Google, Facebook, LinkedIn, or online marketing, it doesn't matter what kind of ads they are, the process and the calculations are the same.

ROAS means ‘return on ad spend’. So when you spend $1 or £1 or whichever currency you're spending, how much are you getting back? If you are getting more than one, that means potentially your, your campaign is profitable. If you are getting less than one, then you are making a loss. But, it really depends on your funnel and how your customer lifetime value is because you may make a loss at the front end, but the backend is where the profit is, I'm going to go through this in a bit more detail later on.

Now, how much ROAS should you target for or aim for? You've got obviously as, as high as possible as you want to go, but sometimes it's not feasible. There will be a limit as to how high you can achieve your return on ad spend and in this table over here, which I've got on my screen, I'm going to show you how we do this.

I'm going to delete all of these so not to confuse you guys. Alright, so we've got three columns, ROAS six X, 600% or six times. If you spend $1, you get six back, three X, you spend one, you get three back and minimum one X, which is a hundred percent, and you're putting in one, you're getting back one.

I've got two types of campaigns here, branded as well as non-branded. So branded campaigns will always have a higher conversion rate for sure. Every kind of brand campaign will have and non-branded, obviously will have a bit less. Now what you can do is you, if you are running a campaign currently, you will have some kind of data in your account.

So you can go into your account and don't just look at the last one week or 30 days, if you've been running for a good few months or maybe years, try and get a good data set of about six months or minimum three months, and see what you are getting. First metric we will look at is the ‘average conversion value’.

So this is how much when somebody makes a purchase on your website, how much are they spending on average? Is it a hundred, 200? And so on from your online shopping cart, you will probably, well, you should know the number. Let's keep it simple, let's say whenever somebody makes a purchase, our average order value is a hundred.

Then what we are, what we want our ROAS to be, the desired ROAS. So we've got three columns here, One is for, six X, three X and one X. So we're going to put in six, three, and one. Now you can change these if you want, that's not a problem and then you can work out your maximum profitable CPC bid.

What bid is your maximum bid that you can afford to give to Google or afford to pay Google, to be profitable for your return on Ad spend. From your data set you will also have a conversion rate in your Google Ads account. What is your conversion rate? 3%, 5%, 10% and so on. Now, on average, if you are brand new to this, and you've never done this before, on average a first time visitor to any website selling products i.e an eCommerce website, will have an average of around 3% conversion rate. 3% if you're hitting is pretty good and you can aim to improve upon it.

But 3% is the average right across the board for branded campaigns. I'm going to keep it a bit high and see what happens, so I'm going to keep it 10%. And now we've got these numbers over here for the maximum CPC bids, which we can afford to pay, pay Google. The formula for these is your conversion, average conversion value, which is a hundred, divided by your desired ROAS, which is six and you times it by 10.

So you get a maximum, so the maximum bid you can afford to pay to achieve a six X ROAS is $1.67, for three X it's the same thing, you get 3.33, and for 1 X, it is $10. So this is where you will need to bid so you can achieve these profitable ROAS. Now, if I were to take the same figures, hundred will be the same, but let's say keeping all the conversion values the same, the desired ROAS would be six, three and one, non-branded will usually be less.

And now our ROAS, profitable CPC goes right down to 50 cents, $1 and $3. So what this is showing you is you can afford to bid really high if you are trying to break even, and as your return on ad spend goes up, you cannot go as high on your bidding as possible. And what that will do is for your campaigns, to be, you may not be very competitive in your bidding, and you may lose out in the auction.

So you need to have this fine balance of your maximum profit or your profitable ROAS and a very competitive bid, you can't have both, you'll never have both. And that's why most companies and most advertisers will aim or shoot for a very high ROAS, and they may not know how to calculate this way and they'll keep on bidding.

Unfortunately, they are going to make a loss because they will never be able to hit these metrics for 600% or more. Now, this is what most or many advertisers, which I see, when they come to me are doing. There is a big difference as to if I were to copy this, all of it, and, but put them over here.

So what most advertisers do is, I'm gonna make this a different colour is they are looking at just that first time transaction. Now for most businesses, including ours, if we do a good job for our client, they are going to come back. So it's a recurring income, or maybe a returning customer, right? A lot of the clients who we get for e-commerce, what they are working their ROAS on is just a one time purchase.

They don't think, or they don't take into account, potentially some more purchases that same customer is going to make if they were to come back. So let's say, this is what we call a Customer Lifetime Value. Now this does not mean that until the customer dies, it means that you need to look at it for a longer period of time, how long a customer stays with you.

It could be 12 months, it could be 24 months. Most businesses, 12 months is good enough on average for two years. So let's rework these numbers on the basis of a customer lifetime value of potentially that same customer who spends a hundred dollars and then comes back four times in the next two years, yeah. Because you will have remarketing campaigns, you will have email marketing, you will have social media, you'll have lots of things going on to get your customer back because you paid that acquisition cost to Google or whichever platform you're advertising with.

You don't want them to go away after just that first purchase. So what happens is, if keeping that average order value or conversion value the same and keeping all the other metrics that you know exactly the same, the conversion rate etc, all we are doing is changing the conversion value, which is the customer lifetime value. Now you've been running, if you've been running your business and you know that on average we are getting three or four orders after the first order, you have to take that into account and not just work on the first time order.

Now, all of a sudden look how competitive you are compared to that. If your competitors can only afford to pay $1 and 67 cents, whereas you can afford to pay 6.67 or 13.33 or $40, or all of these metrics, there is no way in the world your competitors can compete with you in the auction. Every time you're going to win and your Ads are going to show up way more times than your competitors.

So this is why it is absolutely critical and important that you take into account your customer lifetime value and not just work on the first transaction. You will find a lot of these big companies, supermarkets, online stores - they will have special offers as lost leaders because they know once they come to them, we are going to buy lots of other stuff.

The same way in a supermarket, you will have some items like bread, milk, these supermarkets will probably sell at breakeven, or just making very minute profit margins on it. Because we, they know when we go into the supermarket, we're not just going to pick those couple of items, we're going to buy lots of other stuff as well, where the profit margins are a lot higher.

And that is why you need to do the same thing, is be able to work out your customer lifetime value right across the board, and then bid accordingly and bidding high does not necessarily mean that Google is going to charge you this cost per click. It means that you are going to win that auction, and you are only going to pay 1p or 1 cent of whichever currency you have one pence more than you're, the second best competitor or advertiser in that auction.

So quite often you will find that you are bidding 13.33, but Google is only charging you perhaps $4 or $5, it's because of that. I've got another video, which I'll put the link in the description box as to how Google calculates that ad rank. And this is how easy it is to work out just by doing a little bit of homework, you'll be able to take your campaigns from here to up there and get your ROAS to the maximum amount you want to run to, and also be able to scale because the name of this game is whoever is able and willing to pay the most to acquire a lead or a customer wins.That's it, you can't afford to pay the most, you are not going to win in this game, it’s as simple as that.

So keeping these numbers very clearly in your mind, as well as on paper or in a spreadsheet, you'll be able to work out your bids and what you need to do. So I hope you enjoyed this little video. If you are viewing this as a recording, then please do subscribe and hit the bell notification button and you'll be notified every time we upload a video, which we do upload fairly regularly.

I also go live every weekday at five o'clock UK time. If you have any questions, you can either ping it to me through our website or ask them during the sessions. So until tomorrow, thank you for watching this video andII look forward to seeing i it tomorrow. Bye for now.