Although adjusting the ad settings based on the performance metrics such as PPC (Pay-Per-Click), CTR (Click-Through-Rate), CPM(Cost-Per-Thousand Impressions) can be sufficient to improve the campaign ads, this strategy can only identify the improvement of the leads generation level but not the final purchase. So, we need to introduce the ROI and ROAS.
Difference Between ROI and ROAS
ROI (Return-On-Investment). To calculate ROI, take the revenue that resulted from your ads, subtract your overall costs, then divide by your total costs: ROI = (Revenue – Cost of goods sold) / Cost of goods sold. For example, your product cost is $50, your selling price is $300 for each product, 4 products sold, and your ad cost is $100, then the calculation will be ROI=(300*4-(50*4+100)/(50*4+100)*100% =300%
In fact, when most marketers talk about the ROI, they are referring to the ROAS (Return-On-Ad-Spend). This concept relates only to the value and outcome of the advertising campaign. ROAS=(Sales from Ads – Ads Cost)/Ad Cost. If the sales generated from ads was $500, then the ROAS=(500-100)/100*100%=400%. The break-even point for ROAS is 1:1, in this case, we can see 4:1, which means that for every $1 you spent on the ads, you have $4 in return.
Usually, the company will set up all the tracking in Google Analytics and link the AdWords and Analytics accounts as well. As a result, some marketing agencies will apply the Google Analytic’s eCommerce ROAS Metric, which simply goes as ROAS= e-Commerce Revenue / Ad Spend. If we use the same metrics mentioned above, the ROAS = 500/100*100%=500%
ROAS Benchmark for PPC
ROAS may be various from different industries. It’s difficult to compare a B2C retail business to a B2B event business. When you calculate the ROAS, you need to consider the CPC, CTR, CVR (Conversion Rate). However, you need to pay attention and ensure that instead of the final sales, the CVR here refers to the goal you set in the ad campaign. It may be the email leads, subscription, etc. So, you need to estimate the final purchase rate by yourself. How to do that? Companies have different solutions. Some companies rely on lead generation, and achieve the email conversion from those leads. So the email conversion rate can also be a factor in addition to the factors such as CPC, CTR, and CVR mentioned above.
If you want to find a quick calculator solution, you can also refer to Hubspot’s online ads calculator.