How to calculate ROAS targets in Google Ads with this free tool

How to calculate ROAS targets based my product margins? That is a question many marketers ask themselves. Return On Advertising Spend (ROAS) is a marketing KPI many marketers use to track performance in Google Ads.  It’s calculated in Google Ads as ROAS = conversion value / cost. In short, you can evaluate if your investment in online advertising is successful or not. With ROAS Target, you can take it to the next level by automatically adjust your bids depending on product margins if you do it right.  

How to calculate ROAS

ROAS is the result you get when dividing revenue earned from advertising with advertising expense. Let’s say you spend €1000 on Google Ads and you earned € 2000 from everyone who clicked on your ads – that means your ROAS is 2000 / 1000 = €2:1. It’s an increase of 200% which means that for every € you spend, you generate 2 € in revenue.

N.B. Make sure you don’t confuse this with calculating ROI. ROAS is the amount of tactical investment - ROI is the amount of strategic investment. Look into our Glossary Cheat Sheet for marketers if you want to know more.

If you want to read more about LTV, check out this post: How to optimize the lifetime value of Google Ads.

What is Target ROAS in Google Ads?

Target ROAS is an automated bid strategy in Google Ads, and it means your bids will automatically adjust depending on the end goal you want to achieve. You set an average conversion value you’d like to get for each dollar you pay on ads. So what is the best possible solution for setting my ROAS Target? Well, that’s depending on your cost structure and what you want to achieve.

Say you want to get eight times the money back from what you spend on an ad – then you set that up and no matter what you spend, that is what you’ll get. And the cool thing is that this usually always work. So here you have a direct promise of ROI which is something you can never be certain of when using other forms of advertising, such as an ad in a newspaper.

You can promote products by pushing them onto customers, the so-called push marketing strategy. On the other hand, you have pull marketing, where you instead aim to create a loyal customer base and draw interest to your products when people are searching for something. If your company utilize this pulling method, applying ROAS Target to your marketing is a great idea.

Being data driven is key to act on fast changes in ROAS. Take our free online course and learn how to set targets for Google Ads and Google Shopping. In this course you will also get access to two tools that will help you calculate your ROAS targets and track them.

Take the course here: Free Online-course: How Ecommerce should set Google Ads targets

Applying ROAS Target to your business

Setting up your ROAS target should be something individually customized for each company. In general, people are just guessing when setting up their targets. At Keywordio we have developed an advanced way of setting targets. We use an algorithm that calculates the ROAS based on what your margins are. Every company needs its own strategy,  and you need to ask yourself questions like, Where do I want to end up? Do I need to make a profit from every click? In addition, all costs should be taken into account. Based on all the information you can calculate you need to figure out if you want to go with the conservative approach and save money and don’t take large risks, or if you want to use a more aggressive approach and spend as much as possible to churn out products, move inventory and deliver services.

Three ways to set your ROAS targets in Google Ads

Assume you track conversion value including 25% VAT in Google Ads. If you sell a product for €100 after someone clicked on your Google shopping ad, €100 is tracked as the conversion value in Google Ads. Your revenue, excluding VAT, will be €80. Let's look at three scenarios and what your result would be in each one of them.

Simplified based on product margins

Start with understanding your cost structure and expected margin.

Based on this let's say you can spend 50% of the result from Google Ads on marketing. 50% of €20 is €10. This gives you your ROAS target of 10. (Spending €10 with a required minimum of €100 in conversion value tracked in Google Ads, ROAS Target = conversion value over cost = 100/10 = 10).

The neglected cost in this simplified analysis is overhead cost, agency cost warehouse or lost sales.

Calculate ROAS based on the cost of sales targets

Many ecommerce companies work with a cost of sales targets. They are typically defined for each channel or as a guideline. The cost of sales is the inverse of ROAS, meaning that 10% cost of sales target is 1/10% = 10 ROAS.

This is a detailed analysis based on product margins.

Here is a template in Google Sheet where you can calculate your ROAS target based on your product margins.

Based on this let's say you can spend 50% of the result from Google Ads on marketing. 50% of €16 € is €8. This gives you your ROAS target of 12.5. (Spending €8 with a required minimum of €100 in conversion value tracked in Google Ads, ROAS Target = conversion value over cost = 100/8 = 12.5).

All your keywords and products will have different ROAS when you track that KPI in Google Ads. With different margins, you can also allow different spend. Keywordio runs millions of this analysis for our customers, making sure you spend your marketing budget optimal based on your strategy.

Schedule a call with one of our senior ecommerce experts and learn how to accelerate your growth.