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How to Measure ROAS in PPC and Set Budgets

25 Jan, 2016 McKell Naegle

Earlier this month, we discussed how to set appropriate goals for your PPC campaigns. If you have not read that post yet, I would recommend it before reading this one. Once you have set appropriate goals for your campaign, the next step is really to identify your budget, which will depend on your goals.

There are many tools that you can use to get an idea of how much you will need to spend in order to get to accomplish your goals, like Google Keyword Planner. Before you go about setting your budget and return-on-ad-spend (ROAS) goals, it is helpful to know the following information:

 Your Site’s Conversion Rate

How many new visitors do you need to get to your site in order for just one of them to become a customer? If you are a lead generation site, you will need to go one step further and figure out what percentage of visitors become leads and what percent of leads become customers. This is helpful when combined with average cost-per-click to figure out how much you can spend. For example:

  • Site conversion rate = 10%
  • Site visitors from PPC = 1,000 / month
  • Average cost per click in your industry = $2.00

Given this information, if you could estimate that in one month you would spend $2,000 and gain 100 new customers, that would come out to a cost of $20 per new customer acquisition.

 The Profit Generated from One Conversion

 Now that you know how much it costs you to acquire one new customer from a PPC campaign, you can determine if that cost will allow you to stay profitable. Let’s say in this example that it costs you $10 to produce one unit of your product, and you sell your products for $60. Assume that each new customer buys only one product unit. Your PPC campaign is generating one new customer for every $20 spent, so add that onto the cost of production and now you are at a total cost of $30 per unit and $30 in profit per new customer.

Continuing with the example above:

  • Ad spend = $2,000 a month
  • Revenue per conversion = $60
  • 100 new customers (or 100 unit sales) = $6,000
  • Cost of units sold = $3,000   ($30, per unit)
  • Profit per month from PPC Campaign = $1,000

($6,000 in revenue – $2,000 in ad spend – $3,000 in cost of units)

Now most companies will measure return-on-ad-spend simply by dividing the dollars generated by the dollars spent on advertising only.

That traditional definition would give us a ROAS of 300%, which is pretty darn good. But it might be a little bit misleading, if your cost per acquisition is not included. This is why it is always important to look at profit and not just revenue. A real ROAS in our scenario described above would be about 50%, which might seem small, but remember we are measuring profit here, not revenue. You are still $1,000 richer than you were before you launched that PPC campaign.

Repeat Purchase Rate or the Lifetime Value of Adding One New Customer

Now things start to get even more encouraging, if you consider that depending on your industry and your product, some people might by more than 1 unit per conversion. They might even return the next month and purchase again! Every additional time a user repeats a purchase your cost per acquisition gets cut down, and your profit jumps up a bit more.

If 20% of the people buy two units when they visit your site instead of only one, then your scenario changes.

  • 120 unit sales = $7,200
  • Cost of units sold (production and acquisition) = $3400
  • Ad spend = $2,000
  • Total profit = $1,800

Say you increased you profit by $800, with only a 20% repeat purchase rate. That’s almost double what it was before! This is accomplished because repeat purchases both lower cost of acquisition, and generate more revenue. Which is why retargeting is such a good investment for most companies.

 If you are not happy with your current ROAS, you need to change your focus. Some metrics to focus on are the on-site conversion rate, the repeat purchase rate, and the cost per acquisition. Those really are the three key metrics for improving ROAS. The next best thing you can do is to check out our digital marketing services

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