What ROAS should I target?

… is not really a question for your paid search team.

It’s a question for YOU.

It depends on:

-         Profit margin
-         Selling expenses
-         Anticipated CLV

With these data points you can back out break-even targets for ROAS that establish a theoretical lower bound. But determining the profit-maximizing target is an *empirical* question, since it depends on the auction environment.

There’s generally a negative correlation between ROAS and revenue, i.e. revenue increases as ROAS decreases. If we plot cost on the X-axis and revenue on the Y-axis, ROAS is represented by a curve that starts off steep and flattens.

We move along this curve by changing our ROAS target. Establishing profit-maximizing ROAS involves measuring the change in performance associated with moving between two different points along that curve, e.g. the impact on spend and revenue of decreasing ROAS from 300% --> 250%.

This allows us to establish the incremental ROAS of moving from point A --> B. The profit maximizing ROAS target is determined when the incremental ROAS = break-even ROAS. Beyond this point, additional ad spend drives incremental conversions, but reduces profitability. The reasoning above also applies to profit-maximizing CAC, with suitable modifications.

In practice, identifying a profit maximizing ROAS target is complicated, not least by the fact that paid search doesn’t happen in a vacuum. Google Ads performance both influences, and is influenced by, activity in other marketing channels.

But even where the profit-maximizing ROAS target can’t be determined with precision, more attention to incremental ROAS can help advertisers rule out the worst cases of overspending (or alternatively underfunding) in their paid search programs.