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Why doubling your E-Commerce’s businesses Google Ad budget won’t increase your ROAS. (in the short term at least).

30th of January 2020

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It’s every e-commerce brand’s dream. Your Google Ads strategies are absolutely killing it (it’s working, OMG it’s working). Your ROAS is through the roof and your knee-jerk reaction is to throw more budget into these magical digital buckets and watch money rain from the sky. 

And I’m about to shatter your dreams (momentarily at least, sorry)

Maintaining or increasing ROAS when increasing ad spend is the bigfoot of the digital marketing world. People claim they’ve seen it, there may be some blurry evidence of it, but 99% of the time, its impossible to find. 

Here is why. 

 

We all know ROAS = Revenue / Ad Spend. 

How much revenue can be generated from your Google Ads traffic for an e-commerce website can be explained by this formula; 

Revenue = Clicks x Conversion Rate x AOV 

 

Let’s run through a fictional case study. Now we tell the tale of Barry. Barry sells stubby coolers, also known as Koozie for our friends in North America. (Yep, we are an Australian agency, mate.) 

Barry spends $1000 a month on Google Ads. Barry’s Google Ads bring his website 2000 clicks a month, his average conversion rate is 10%, and his AOV is $25. 

 

So Barry’s Revenue would be, 

Revenue = Clicks x Conversion Rate x AOV, 

2000 x 0.1 x 25 = $5000, 

Barry’s ROAS equals $5000 / $1000 = 5.0. 

 

Barry decides to double his ad spend. 

“This is going great! I want to spend $2000 next month but keep the ROAS at 5.0.”  

No worries Barry, here’s why you would be better off chasing bigfoot. 

 

Unless you’re missing out on impressions due to budget restrictions, to increase your ad spend, you would need to be bringing in new traffic to your website. Whether that’s through increasing clicks on existing keywords or finding new keywords or traffic sources. 

The thing about new traffic is just that, it’s brand new. We don’t know anything about it but, most importantly we don’t know how well it will convert or how much it will cost. 

Do male or female searchers convert better? What about the days of the week? Are clicks for this new traffic going to cost twice as much? Is this an older or younger demographic that loves your product or do they hate it? 

In this scenario what tends to happen, is the overall conversion rate decreases. Remember those formulas from before? They come in handy here. 

Let’s say with new, unoptimized traffic to his site, Barry’s overall conversion rate drops to 8%. For a moment we will assume that increasing the budget, increases clicks proportionally. 

 

Revenue = Clicks x Conversion Rate x AOV 

4000 x 0.08 x 25 = $8000. 

Barry’s ROAS equals 8000 / 2000 = 4.0. 

Oh no, ROAS has dropped.

 

Let’s unpack the other assumption made above. What if the CPC’s increase and new traffic costs more. Therefore increasing the budget would not increase clicks proportionally. In this case, we will assume the conversion rate hasn’t decreased. 

 

Revenue = Clicks x Conversion Rate x AOV 

3000 x 0.1 x 25 = $7500. 

Barry’s ROAS equals 7500 / 2000 = 3.75.

Ouch. 

 

The ROAS got to the place it was through the hard work, data analysis and optimization of your digital team.  Over time, the more that is known about your traffic and clicks the better it will convert. 

Considering that, when increasing spend and the unknown cost or conversion rate of that traffic, as demonstrated above by Barry, it is very hard to maintain or increase ROAS in the short term. 

For all the devil’s advocates out there (yep, I see you), sometimes yes, new traffic does convert at a higher conversion rate right out the gate or the clicks don’t double in price. 

HELL YEAH! but in our combined experience of many many years and $10+ million dollars of Google Ads spend it takes a bit of time to optimize that new traffic to get it converting at a similar or better rate as before increasing budget. 

 

Keep these formulas and numbers in mind next time you are considering increasing your Google Ads spend. You’re about to embark on a search expedition into the wild, it will take some time covering potentially treacherous ground to get there but in the end, you may just spot bigfoot.

Written By
Kate Sheridan


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