Paid advertising is a huge inbound channel for many businesses. The benefits of paid advertising can be huge when utilized properly. You’re able to get your name in front of a very specific audience that fits your target market, and you only pay for it when someone actually clicks on it. It’s a great way to build brand awareness, grow traffic, and get your name to the top of the list in searches.
The problem that many organizations face is efficiency with the ad spend. Most campaigns are spending a ton of their ad budget on keywords and searches that end up producing no conversions.
A conversion is different for every business. It could be a website transaction, a contact form submission, or just spending X amount of time on the site. A conversion for a business tells you that the traffic quality is high. It’s the traffic that you want. Regardless of your definition of a conversion, your ad spend needs to be optimized in order to drive as many of those conversions as possible. That’s how you bring true value and efficiency to your paid campaigns.
There are countless ways to try and track performance of a paid campaign. We’re going to focus on the two metrics that can narrow your focus and avoid the noise of analytics. For our examples, we will use eCommerce transactions as our conversion definition.
- ROAS (return on ad spend)
This one is pretty straight forward.
ROAS = How much you made / How much you spent
The metric is great because it shows you exactly what your revenue to ad spend ratio is. For every dollar you spend on an ad, how much money are you getting back? There are a lot of different tactics on trying to optimize your ROAS, and you can look at it on a granular level.
If you have ads that are below a 1.0 ROAS, that means you’re loosing money on that ad. You’re not even getting back the money that you put into it. It’s time to take a deep dive into that specific ad and figure out why it’s not performing correctly. There are many reasons that could be:
- Poorly written copy
- Bad keyword selection
- Non-converting keywords
- Limited by budget / low impression share
- Low ad rank
- Bad landing page
Looking at all of these possible issues can help you understand why your ROAS is lower than you would expect. It’s also important to set a ROAS target for your ads so you have a goal to work towards. Setting up this goal is no exact science either. Benchmarks are different depending on the industry, and no two businesses are the same. Strategies and goals are all over the board and will be different based on your strategy, goals, market, and your business.
This one may seem obvious after going over ROAS, but it’s a completely different analysis that can allow you to get really granular into campaign efficiencies.
To calculate this one, you’ll need to export your search term report out of AdWords and do some excel work. But basically the formula looks like this:
AdWaste = Ad spend on search terms that do not convert / Total spend
This gives you a percentage of money that you have spent on keywords that have not converted. The resulting percentage is usually staggering for those looking at it for the first time. A recent account analysis for a client showed a 92% AdWaste ratio over the past 12 months. That means over the last year, 92% of the money they spent on paid ads went towards search terms that resulted in zero revenue.
Crazy right? Unfortunately, this actually happens all the time.
This happens because campaigns are not being monitored, adjusted, and optimized for efficiency. Pay per click advertising is not a set-it and leave-it channel. It needs constant massaging and testing in order to become a revenue driving monster for your organization.
Also understand that there is never a perfectly optimized account either. You’re never going to see AdWaste be 0%. There is always going to be some AdWaste. That’s because there is going to be campaign testing going on. A/B testing ads is how you build efficiency and understand what keywords convert and what keywords don’t. Without testing, you’ll never see improvements. You’ll also always have some campaigns that are not designed to convert traffic. Maybe they are there as awareness building instead of converting. This is that “top of the funnel” traffic that exposes people to your products, services, and brand, but don’t actually convert them into customers right away.
The idea is trying to figure out a way to balance between a health AdWaste amount versus unhealthy. That’s also a metric that not standardized as it’s dependent upon your organization, industry, and strategy.
At the end of the day, all these metrics are designed to tell you how your campaigns are doing relative to what you want out of your paid ads. It takes a lot of analysis and time to understand what’s going on with the performance and testing them to better optimize the campaigns. That’s why we highly recommend working with a professional that can provide guidance and manage the accounts for you.
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