how-to-roas

How to Calculate Your Target ROAS and ACOS for PPC

Just think. There are 1,000’s of advertisers running ads right now without knowing what their ROAS or ACOS targets are. 

They operate on feelings: “it FEELS like things are improving.”

They are then doomed since their optimization can’t be centered around a target. Don’t be doomed. Calculate your minimum ROAS and maximum ACOS with this video.

HOW TO FIND YOUR TARGET ROAS &ACOS

SO WHAT ON EARTH IS ACOS AND ROAS?

Here we go. ROAS stands for Return on Ad Spend, also known as Revenue Over Ad Spend.

So for example, if you generate a $100.00 in sales from $20.00 of ad spend, that would be a return on ad spend of 5X, sometimes referred to as 500%, multiply it by 100 at the end there.

So it’s very simple, 100 over 20 equals five, simple as that.

On the other end of the spectrum, we have ACoS, stands for ad cost of sales, also know as Ad Cost Over Sales. Very simple, if you have 20 ad cost and revenue of 100 bucks, then you ACoS would be 20%. And if you were paying attention, this is actually the exact same, you know it’s representing the exact same thing. A ROAS of 5X is an ACoS of 20%, because 1 over 5 = 20%.

ACoS of 20%, one over .2 = 5. So these are actually the same numbers and they’re used to represent the amount of revenue you have generated and the amount of ad spend you have spent.

HOW TO CALCULATE YOUR BREAK EVEN ACOS

Now there’s a concept of minimum return on ad spend, or maximum ACoS, is extremely important.

This is the break even point. This is the point at where you will start losing or making money.

How do we actually calculate what our minimum or maximum ACoS should be? 

To to calculate this break even point, we just need a few things. We need revenue, cost of goods sold, and any other fees, like your Amazon fees, or merchant fees, profit per sale and then we’re going to calculate our max ACoS and our minimum return on ad spend. 

Let’s say you sell something and you generate $100 of revenue. It has cost of goods sold of 20 bucks, you have other fees accounting for $15.00, which gives you profit for sale of $65.00, meaning every time you sell this $100.00 product, you make $65.00. Now your break even as spend is $65.00. Meaning if you spend $64.00, you’re going to make $1.00 and if you spend $66.00, you’re going to lose a dollar. 65 is your break even. And when you translate spending 65 to make $100.00, that turns into a minimum return on ad spend of 1.53 and a maximum ACoS of 65%. Anything higher than this ACoS, you’re losing money. Anything lower, you’re making money. Anything lower than this minimum return on ad spend, you are losing money. Anything higher, you’re making money.

WHAT SHOULD BE MY TARGET ACOS?

So all business have some rationale for how much they actually want to spend of their profit per sale on ads. You need to make this decision for your own business. I’ve seen people want to get very aggressive. Maybe in a situation like this, they only want, they want, if 1.5 is the minimum return on ad spend, they only want to hit 1.7, or even 2X, and that’s it.

I’ve seen other people that say, “Hey, I need to be really profitable with my ad spend, so I need a minimum return on ad spend, even though it’s 1.5, I want to set a target for 3X or for 4X or so.”

So it’s really up to you for deciding how much you will actually want to spend of your profit on paid ads. So in practice, this might be a pretty simple example here. So this is the exact same situation, except, well, let’s break this down, exact same situation, revenue, 100, cost of goods sold 20, other fees, $15.00, profit per sale, 65. So it’s the exact same product, exact same profit margin, except this time we’ve added the percent of profit you actually want to spend on paid ads, which in this case is 50%. Which means 50% of 65 is $32.50. Meaning, that’s their target of how much they want to spend to get a sale, which gives us a target ACoS of 32.5%. Or a target return ad spend of 3.0. Want more content on ACoS? Here’s a great post on it by Ad Badger.

HOW TO MANAGE THE ACOS OF MULTIPLE PRODUCTS

Now in practice again, this is really simple in theory to just go through this exercise for one product, but as soon as you start having dozens and dozens of products, this becomes a lot more challenging. So what do you actually do? Well, you run through this exercise on all of your products, and you group them. You can group them and it looks something like this. This is an easy example of grouping your products with closely related return ad spend targets and then grouping them together in their ad groups.

So for example, product one and two, they both have a target return on ad spend of 4 and 5 respectively. Meaning, you just take both of these products and put them into an ad group target targeting 5X. If you take a look at product three and four, you can see that they, same situation, target return on ad spend is eight and 9X, you can just take both of those and put those in the 9X target. So when you group things like this, it allows you as a starting off point to easily organize your campaigns.

INCLUDE YOUR TARGET ACOS IN CAMPAIGN NAMES

And of course, the last step, again, in practice you need to be really clear with your labels so you don’t forget any of these things. Every campaign should have a KPI on it. For example, water bottles, plus search, plus cold traffic, plus return on ad spend, 4X target, plus USA. 

So I have the product that I’m selling, I’m having the network that it’s on, I’m having the audience that I’m serving it to you, I’m having the return on ad spend targets and the geographic region. 

Very simply, very clear, I’ll never forget what the return on ad spend target should be when I’m optimizing that campaign.

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Michael Erickson

Michael Erickson

Emailing my clients and telling them I helped increase their return on ad spend by 300% never gets old. I love rising above the technical jargon and providing your business with online marketing momentum to reach new heights. Enthusiast for all things science, surfing, and Search Scientists.
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