If you are looking to begin paid advertising online for your company, there are a number of factors that you need to consider to ensure it is done cost effectively, and to ensure you generate results. These include your monthly budget for advertising, the cost of the advertising platform – do they take a percentage of your revenue for example, any management costs you have and costs to your company e.g. products, materials, delivery costs.
When paying for advertising online, you need to know a monetary range of what you can spend, and what you need to get back to break even and then make a profit. This will give you a clear picture of all spend and will give you an informed approach to paid advertising activity.
Let’s take a look at how to break this down clearly.
What are your margins or Advertising Cost of Sales? (ACOS)
ACOS or Advertising Cost Of Sales determines how much you spend on advertising in order to generate £1 in revenue, and is a common metric that is used for Amazon sellers. Return On Ad Spend (ROAS) and ACOS are great metrics for PPC to see if advertising campaigns are profitable.
Your ACOS is calculated by taking your costs and ad spend and dividing it by your revenue. For example, if you launch an ecommerce campaign that generates £500 in sales, costing £25 in total, you then divide £500 by £25, and get your ACOS of 20% cost for every pound of sales you make. This means you spend £0.20 for every £1.00 of revenue from that advertising.
Why You Need To Know Your ACOS
You need to know your ACOS in order to determine how successful your ad campaigns are and your level of profitability. To determine if your ACOS is profitable you need to know your break even point of your individual products, service and/or on a company wide scale.
Break Even Point
Your break even ACOS is the amount you can pay out where you won’t make a loss on the sale, but you also won’t make any profit either. It’s a level that allows your business to keep running, appear to a wider audience without a focus on profit. Your break even point helps you see whether you’re netting a gain or loss and paying people to buy your product at your own expense.
To determine the break-even point, start with your product and sale prices. Say your sale price is £10 and fees are £1, cost of production is £2, delivery is £1 altogether you are paying £4 before the product is ever sold. You then take the £4 of cost from the £10 sale price and you’re left with £6. This is your profit before ad costs, or how much is generated each time you sell your product from an organic source, direct source or source medium without any additional costs for ads.
Your break even ACOS is then £6, because if you spend all £6 on ads to get a sale and you have no other costs, and your expenses before advertising is £4 in upfront cost, you receive no profit or loss.
Custom Columns For Google Ads
There are a huge range of default metrics in the Google ads platform that allow you to evaluate performance but you can also create bespoke custom columns based on existing metrics in Google Ads.
Custom columns offer a convenient solution if you’re interested in seeing nonconventional data within the platform. ACOS is a metric often used for Amazon rather than Google ads which favours ROAS but why not have both options?
If you haven’t used them before, custom columns are available through ‘Columns’ > ‘Modify Columns’ then by scrolling down to ‘Custom Columns’.
In order to create an ACOS column add a name then + Metric, Performance and cost then click the divided symbol and again + Metrics, Conversions this time and Conv. Value then click on data format and use numbers or percentage depending how you want to show the data before clicking save.
ROAS – Return On Ad Spend
ROAS stands for return on ad spend, a metric commonly used in marketing that measures the amount of revenue your business earns for each pound (£) it spends on advertising.
In some cases it is used interchangeably with other metrics you may be aware of such as return on investment (ROI). In this case, the money you’re spending on digital advertising is the investment on which you’re tracking returns.
It should be noted that having a high return on ad spend does not necessarily mean a company is profitable, as there are many other expenses that have to be deducted before determining a company’s net profit margin. This metric does, however, show the existing correlation between advertising efforts and revenues.
Commonly ROAS is the key metric used to measure the effectiveness of your advertising efforts for ecommerce businesses.The higher your ROAS, the higher the level of profitability but profitability often contradicts the volume of revenue.
How to Calculate ROAS
As ROAS/(“Conv. value/cost”) is a key metric and is the focus of many marketing activities, you may assume it is a complex formula to calculate but fortunately that is far from the truth. ROAS is your total conversion value/revenue generated divided by your total advertising costs of all ad interactions. The cost in this metric excludes interactions that can’t lead to conversions, such as those that happen when you aren’t using conversion tracking.
If it costs you £20 in ad spend to sell one product at £100, your ROAS is 500% meaning for each pound you spend on advertising, you earn £5 back. The lower your ROAS, the increased chance of sales as you are saying you are willing to take less profitable sales and enter an increased number of auctions but then it is less profitable.
Would you like more money in the bank, chance of repeat customers and general growth with the option to pull back to be increasingly profitable if needed or higher profitability on a smaller number of sales restricting your reach?
What is your ROAS break even point?
Any ACOS target can easily be converted to a ROAS using the following sum:
ACOS target into ROAS: 1 ➗ 0 . 2 ACOS number = ROAS
ACOS target = 20%
1 ➗ 0.20 = 5
ROAS target = 5 (500%)
Cost Per Conversion (“Cost/conv.”) or Cost Per Action/Acquisition shows the average cost of a conversion; it’s the cost divided by the conversions. Your conversions could be a range of different actions made on your site from: calling, emailing, form submissions, downloads and more. Some conversions may cost more than your target and some may cost less, but altogether you will have an average cost that you can not surpass without it becoming unprofitable. Your average CPA may fluctuate depending on a range of factors outside Google’s control, such as changes to your website or ads, or increased competition in ad auctions to social and economic factors.
So if you get 10 leads a month spending £1000 on Google ads and out of those 10 conversions you turn one into a sale and 1 lead converts at a revenue amount of £1000 you are breaking even. Then you know the most you can pay per conversion in order to break even is £100 when only taking into consideration the advertising costs and not any additional margins. But if you then know it costs you a further £50 on average to get the sales across the line then you can spend £50 per conversion to break even. This might not take into account additional benefits to other traffic sources nor long term value to your company.
Then you can use target CPA bidding, a smart bidding strategy from Google and for example, if you choose a target CPA of £50, Google Ads will automatically set your bids to try to get you as many conversions at £50 on average, some may be more and others less. Then to further enhance your bidding and help improve your performance in every individual ad auction, this strategy adjusts bids using real-time signals like device, browser, location, time of day, and remarketing lists to help optimise your performance.
Estimating revenue is difficult if not impossible as it is always an estimate or a prediction; unless you have a crystal ball or magic lamp you can’t say how Joe Blogs from Newcastle will convert at 3pm on a Wednesday – Joe won’t know themselves. But we can react to data that shows conversions often happen at 3pm in Newcastle on Wednesdays. With some data you can estimate growth but it does NOT take into account seasonality, social or economic trends so again it is an estimate.
For example, if you know the average CPC of what you are bidding on and your estimated monthly spend you can then work out the number of clicks you should generate. From there you can estimate your conversion rate based on other channels and divide the number of clicks by the conversion rate to work out the number of leads of sales. You can then, on average, determine the number that convert to sales and by taking the average sales value, multiply them together to work out the estimated revenue. Finally, if you know your target spend and return/revenue you can estimate the return on investment and if it covers your bottom line.
Seasonality & Trends
Google Trends is a powerful tool for displaying trends because it can allow us to explore different moments and how people react to those moments allowing you to predict market trends. For example, if a client sells air conditioning products, there is seasonal demand for the product range that is dependent on external factors outside of the marketplace.
In the latter part of the graph there’s a spike in search queries for air conditioning which demonstrates a sudden acceleration of search interest in this topic, in comparison to usual search volume. So it is clear there has been a change, in this case the weather has been the trigger caused by a heatwave. When you add the keyword “heatwave”, over the same period in the same location (UK), there’s a clear correlation between the increase in searches pertaining to air conditioning in relation to searches for heatwave.
When you extend the date range it displays a wider trend over several years which will help predict when spikes may occur in the future if the other factors are the same. Looking at the past five years you can clearly see a pattern forming in the data that this result is not a one off.
The trend is that every time there’s a heatwave there’s also a large increase in interest for air conditioning, this kind of data analysis confirms external impacts on your market.
There are a range of factors that can and will affect your conversion rate that are out of your control; from competitors entering the marketplace, a shift in seasons creating a demand for shorts and t-shirts or coats, social factors like the World Cup, economic factors such as Brexit and events and occasions such as Black Friday or Fathers Day.
Generally speaking you will likely have peaks and troughs throughout the year so avoid reacting drastically to small changes without data to back it up and have a target range so you aren’t limiting yourself.
To find out more about our range of paid advertising services contact us today!