How to Fine-tune Your Target ROAS

Many bidding platforms offer some form of Target ROAS bid policies. These strategies will typically try to maximize the volume of a revenue metric, at a designated ROAS (Return On Ad Spend) value. Often you will set the ROAS target based on a known value of doing business, maybe due to an understanding of what margin of revenue is required on your ad spend to ensure profit, for example, or simply “what performance always has been.”

How do you know what ROAS target will actually result in the highest profit? Even if a Target ROAS metric is being met, there is no guarantee that you are capturing the maximum amount of profit available. A higher ROAS target may result in similar revenue, with lower spend. A lower ROAS target may conversely result in increased revenue, with similar spend.

To discover if performance is short of what it could be, we need to know a few things:

  • What is the current target set at?
  • What is the intrinsic ROAS value of the group?
  • How far, and in what direction are these two values different?

The current target is easy to find, but you may be asking – what is this intrinsic ROAS idea?  Intrinsic ROAS is a somewhat abstract concept – it can be best defined as the most profitable ROAS that could be obtained with the current combination of biddable objects, competitive landscape, landing page performance, ad copy, etc, in your account. In other words, the actionable factors that can impact account performance.

Unfortunately, there isn’t a place where we can just look up this number. But with a little bit of detective work of looking at the previous performance of the account, we can get some hints about whether this intrinsic ROAS is below or above the current ROAS target that is set.

To begin identifying what this intrinsic ROAS is, we need to look at some components that make up ROAS performance, and how they trend over time. These components are:

  • Volume of Revenue.
  • Volume of Cost.
  • ROAS itself.

By observing the interactions between these components over time, we can then deduce whether this hidden, intrinsic ROAS is below or above our current ROAS target. Take a look at the following scenarios, and find the one that is closest to your account’s characteristics.

Target ROAS | Figure 1

If your Revenue is the same, Cost is increasing, and ROAS is lowering towards the target set: Your target ROAS is likely too low. Because revenue is ‘stuck’, there is a decent chance that your close to hitting the limits of revenue available with your current setup, and the optimization strategy is spending in very inefficient areas in an attempt to increase revenue volume. The recommendation here is to increase your ROAS targets to the higher historical ROAS your account had, at a time that revenue was similar.

Target ROAS | Figure 2

If your Revenue is decreasing, Cost is decreasing, and ROAS is increasing towards the target set: Your target ROAS is too high. The optimization strategy is reducing spend in an attempt to hit a potentially unattainable ROAS target at an ‘acceptable’ revenue volume. If you are after an increase in volume, its best to lower the Target ROAS.

Target ROAS | Figure 3

If your Revenue is increasing, Cost is increasing, and ROAS is the same: This is a great situation to be in, congratulations! You have a few options here, depending on what your business goals are:

  • If you wish to increase revenue – keep the target constant, until revenue and cost begin to flatten out.
  • If you wish to keep revenue, but spend more efficiently – increase the Target ROAS, and observe revenue for consistency.
Target ROAS | Figure 4

If your Revenue, Cost, and ROAS are the same over time: This is also a good situation to be in. You have similar options to the above situation, but with a twist. It’s currently unknown if you are hitting the limits of available revenue, or if there is more out there to obtain. You have a couple of options to try:

  • If you think there is more revenue available: Decrease Target ROAS. There may be more revenue available at a lower ROAS that works out to be profitable.
  • If you believe that most of the available revenue is already being captured: Increase Target ROAS. If most of the revenue is already being captured, then it is possible that there is some amount of inefficient spend. By increasing the Target ROAS, you are likely to remove that inefficient spend first.

It’s important to understand that this approach to tuning ROAS is a bit more of an art than a science, and it can take some time to find what the ‘true’ ROAS target should be. Trends are usually not as clear and obvious as we would like. It’s often a good idea if your daily data is a little ‘spiky’, or if it is low volume, to aggregate your time frames to weeks (or even months!) to get a smoother visualization of the trends in your account. Also, remember to take into account known seasonality when looking at trends, especially when this data falls over holiday periods and the like.

It’s also important to revisit your ROAS goals when a noticeable change to the account occurs. This could be an acute event such as changing your landing page (potentially resulting in a different conversion rate), or something more subtle (for example – the introduction of a competitor to your space, increasing the bids required to win keyword auctions). Even if none of these events happen, it’s still a good idea to think about re-tuning your targets every quarter or so.

The above playbook should give you more confidence in knowing you are moving ROAS targets in the right direction. Tuning your ROAS goals regularly will also help you understand the relationship between Target ROAS and account performance, and give you the ability to improve performance in your account over time.

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