Google-Ads Hack: ROI, ROAS & POAS Explained

As a company, but certainly also as a digital agency, you cannot ignore it. Google & Facebook Ads have become an integral part of online marketing. They are the excellent tools to promote and grow your business online. Ads influence users in their buying behavior and that can lead to a higher conversion rate. The purchasing needs and wishes of consumers are of course very personal and it is therefore important that your campaigns are in line with these factors. Both the Return on investment and the Return on Ads Spend provide insight into how profitable the current campaigns are. In this article we tell you more about ROI, ROAS and POAS.

ROI,ROAS and the difference between these two terms

Return on Investment is an important term to find out whether your activities actually generate money. ROI . is especially important in digital marketing an important term.

What is the ROI of your Google Ads Campaigns? Are the campaigns profitable or is it better to go in a different direction? ROI is based on your marketing goals and provides clear insight into the impact the Google Ads campaigns have had on your business. By calculating the ratio between costs and net profit, you gain insight into the amount you earn or lose with your campaigns. To calculate ROI, subtract the amount spent on the campaigns from the revenue the campaigns made. This number is then divided by the amount spent. The formula is as follows: 

ROI = (Revenue – Cost) / Total Cost

Another similar term, Return on Ad Spend (ROAS), compares how much was earned with how much was spent. It provides insight into your online marketing efforts and whether they are profitable. When you have made it clear to yourself how much ROAS you need to achieve, you will no longer run into limitations in your budget. You know what every dollar you invest will yield when you have established your ROAS. This allows you to spend more, as long as the ROAS stays at the same level. 

ROAS = Revenue / Advertising Cost 

What is the difference between ROAS and ROI? The difference is that ROAS focuses on revenue while ROI focuses on net profit. The Return on Ads Spend only considers the amount spent directly on the ads. Return on Investment takes into account not only expenses but also additional costs, such as production costs and overheads. 

Example of ROI

Let's say you sell products on Google Ads for $50 each, and they cost $10 to produce. You sold 10 of these products online through ads on Google Ads. Then there is in total for €500 products sold, the cost for Google Ads is €200. This results in the following ROI calculation:

(€500 – (€100 + €200) /(€100 + €200)) = 0,67 

0,67 equals an ROI percentage of 67%. But what exactly does this mean? An ROI percentage of 67% means that for every euro spent in the campaign, €1,67 is returned to the drawer. 

Example of ROAS

A campaign you've set up will earn you $500. The cost of this campaign is €200. You calculate the ROAS as follows:

€500 / €200 = €2.50

The ROAS of €2,50 equals a ratio of 1:2.5

Why is tracking Google Ads ROI and ROAS important?

It's important to keep track of various statistics such as impressions and clicks† You can measure the actual impact of campaigns on your company by calculating the ROI and ROAS. 

As mentioned above, measuring your ROI and ROAS will tell you whether your Google Ads campaigns are profitable or not. In addition, it provides insight into the contributions that the advertisements make to achieving your objectives. It is useful to use the ROI and ROAS when optimizing Google Ads strategies. When a certain advertisement achieves a high ROI/ROAS, it is beneficial to invest a larger part of the budget in this campaign. On the other hand, when an ad has a less high ROI/ROAS, you can choose to stop this ad or improve it on the basis of previous successes. 

POAS, what is it?

Profit On Ad Spend provides data and insights that revenue alone cannot show. To calculate the POAS, other costs, profit margins and product margins are taken into account. POAS can provide clear insights when you want to optimize campaigns. It gives a more comprehensive picture of which revenues have been generated and which have not. This makes it possible to bid more on profitable campaigns and stop or pause campaigns that are not doing so well. 

POAS = Gross margin per ad : advertising costs

How do you apply Profit On Ad Spend?

1. Determine gross margins

It's important to identify the difference between internal costs and Google Ads costs. The gross margins can be calculated manually or this data can be linked in a PPC Management software tool. 

2. Allocate gross margins to your ads

It is recommended that you send the gross profit data to Google to get a better idea of ​​your profitability. You can use Google click ID in Google Ads for this. It is also possible to set a goal on Google Analytics. 

3. ROAS set up only one POAS target

After successfully importing the correct gross margin data into Google Ads or setting a target in Google Analytics, you can apply Google's bidding strategies to improve your bid and increase your net margin. You compare your new POAS costs with your ROAS revenues. 

Conclusion

It is important for your business to set clear objectives and KPIs in advance. This allows the ad campaigns to be better evaluated with substantiated expectations. It is important to run your campaigns for a while and give them the time and space to get to the attention of your target audience, in order to drive traffic to your website and ultimately generate conversions. It is therefore not recommended to start meaning your ROAS or ROI too early. The goal is of course to make as much profit as possible, POAS is preferred. It is a direct statistic in online advertising that is easy to understand and use. In addition, POAS is still fairly new, so you can present better faster than your competitors when you use it. 

Want to know more about Google Ads? Check out our blog about deploying Local Business Campaigns