How to Choose the Right ROAS Target
What is ROAS and How Do You Calculate It?
Setting a ROAS target for your search marketing programs is very important to ensure you’re maximizing the effectiveness of your paid search budget. It helps you evaluate which campaigns and keywords are profitable, and which are not.
To start, let’s make sure we’re aligned on what ROAS is –
To calculate this, we simply divide revenue from advertising by the cost of that advertising.
- For example, if I spend $100 on Google Ads and that drove $400 in revenue, my resulting ROAS is 4 (also expressed 4:1 or 400%).
As an advertising specialist, I regularly get asked what a “good” ROAS is, and unfortunately the answer isn’t black and white. A good ROAS is one that’s sustainable for your business, while allowing you to bring in new customers. How do you find that magic number? Let’s get into it!
Look at your financials
To get started, think about how much you’d be willing to spend to acquire a new customer. We can call this our target cost per acquisition or target CPA. This may require you to think about lifetime value, and the margin on your products.
Now that you have that ideal CPA written down, find the average revenue you make per order (also known as Average Order Value or AOV).
Divide your AOV by CPA. The number you get is your initial Target ROAS.
Check Against the Average
Most clients I’ve worked with over the years have targeted between a 2 and a 10 ROAS. Does your target ROAS from step one fall in that range? If so, great! Keep this target in mind for now!
If yours is outside that range, I’m guessing it’s higher than 10. This means your ideal Cost per Acquisition is fairly low compared to the price of your product. Divide your AOV by 10 — would you be willing to spend this much to get a new customer? If so, great! Let’s stick with 10 for now. If not, you are likely working with a slim margin, and that’s okay! But be aware that this means your advertising options and reach will be more limited.
Compare to your current efforts
Now that you know what you’d like your advertising ROAS to be, see if any advertising you’re running currently is meeting that goal.
Calculate your actual ROAS (revenue from ads / cost of ads) over the past 30 days. Is it higher or lower than your target?
If it’s higher, this is good news! You’re already more efficient than your target. If you’re in a position where you can spend more on advertising, your paid search program is a good place to start. When you’re happy with current spend levels and volume, raise your ROAS target to your current ROAS.
If it’s lower, calculate the % difference following the formula below:
I would recommend targeting no more than a 25% change. For example, if your Actual ROAS is 2.5 and your goal ROAS is 5, the difference between those metrics is 50%. Over the next couple months try targeting 3.75, then once you achieve it you can start working toward 5.
Account for your overall marketing goals
Achieving a high ROAS can be great. One of our favorite activities is trimming inefficient spend out of client accounts and watching ROAS soar! If you are in a position where you need to trim expenses, this is wonderful! In fact, if your target ROAS is similar to your current ROAS, but you’re looking to spend less, consider raising your ROAS target. Clients looking to run a tight ship will typically have ROAS in the 9 – 10 range.
HOWEVER, as you trim your spend, you will also lose traffic volume on your site and your ad will show in front of fewer users, which can impact long term growth. If you have aggressive growth goals, or you are not in a position where you need to cut costs, consider lowering your ROAS target. Clients who have aggressive acquisition or new customer goals normally target a 2 – 3 ROAS.
Curious where to go from here? Let us know!
We’re a performance-driven agency that specializes in optimizing ad spend for your target ROAS. We love delivering quick wins to boost account health or diving into strategic initiatives. No matter your business goals, we’ve got you covered!