Bidding strategies in Google Ads: ROAS vs. CPA Bidding

by Karo
August 12, 2020

BiddingLab offers the bid strategies target ROAS (Return on Advertising Spend) & target CPA (Cost-per-Action). Here we explain briefly what these two bidding strategies are and for whom which strategy is best suited.

Bidding Strategy Target ROAS

What is the ROAS?

The ROAS is an important key figure in marketing and describes the actual profit achieved per Euro advertising expenditure. With the ROAS it is therefore possible to determine the profitability of advertising measures.
For this purpose, the advertising expenditure is compared with the resulting turnover.

Formula: How is the ROAS calculated?

The ROAS is calculated as follows:

ROAS = (sales/advertising expenditure) * 100

The result is expressed as a percentage.

Example: Let us assume that 1,000 € was invested in a campaign over a certain period of time. The turnover resulting from this campaign amounts to 6,000 € in this period.

The ROAS is then calculated as follows :

ROAS = (6.000,- € / 1.000,- €) * 100 = 600

What does this result indicate? When is a campaign profitable?

► If the ROAS value is above 100%, the campaign has generated more revenue than it has cost.

► If the ROAS value is below 100%, the campaign has generated more costs than sales.

However, other costs caused by the campaign are not included in the calculation. (for example, working time costs for campaign management). These additional costs to the AdSpend should always be included by the advertiser in order to ensure that the campaign is managed in a way that makes good business sense.

A ROAS of 600%, for example, says that for every Euro you invest in Google Ads you make 6€ in sales.

What is meant by target ROAS?

With the bidding strategy target ROAS you tell the bid management how high your ROAS should be. The bidding algorithm tries to achieve this ROAS on the basis of already achieved conversions.
If your account does not yet reach this ROAS, the first step of the bidder is often to focus on high-turnover products. This can reduce the traffic at the beginning.

Advantages of the target ROAS

Especially for shopping campaigns the target ROAS offers important advantages:

► The target ROAS ensures that your advertising measures are profitable.
► If you don’t have a fixed advertising budget, but are willing to run advertising campaigns as long as you make a profit, the Target ROAS helps you to achieve the highest possible turnover with your Google Ads account.

Requirements & prerequisites for the target ROAS

Conversion tracking must be set up in order to use the target ROAS.
In addition to tracking the conversions, tracking of the conversion values must also be set up.

Bidding strategy Target CPA

What is the CPA?

The CPA (cost-per-action or cost-per-acquisition) describes the average cost that an advertiser pays for a conversion.

Formula: How is the CPA calculated?

The formula for the CPA is very simple:

CPA = costs/conversions

The result is shown in the respective account currency.

How does the Target CPA bidding strategy work?

With the target CPA, bids are automatically controlled by the bidder so that as many conversions as possible are achieved for a specified CPA. A CPA is defined which is necessary on average for a conversion. The bidder then bids more on the keywords that are most likely to achieve conversions.

Which requirements do I have to meet in order to use the target CPA?

Conversion tracking must also be set up for the bidding strategy “Target CPA”.

Unlike the target ROAS, it is not necessary to have conversion tracking set up for the target CPA. This means that the target CPA is also suitable for websites where no conversion values can be recorded. For example, if a conversion represents the completion of a lead form.

Advantages of the target CPA bidding strategy

► You determine yourself how much you are willing to pay on average for a conversion. But be careful: Nevertheless, your campaigns can still contain high CPAs as long as there are enough cheap conversions – so that the average is kept.
► Not only applicable for online shops: Since no tracking of conversion values is required, it is also possible to use the target CPA for websites where a conversion represents a completed contact form, for example.

ROAS or CPA: Which bidding strategy should I choose?

The answer to this question is primarily related to the type of conversion tracking. If no conversion values are tracked, no target ROAS can be used and therefore the answer is easy. Target CPA!

However, if a complete conversion tracking including the values is available, the answer is no longer so easy. However, in order not to make this topic too complicated, the following core question should be asked:

What is the focus I am aiming for? Turnover or average acquisition costs?

With target ROAS, the focus is on sales, which tends to favour products with high value.

In target CPA, however, the value is relatively irrelevant and an increase in sales is more of a happy side-effect. The focus of this strategy is rather on the quantity of conversions that contribute to the average cost target of conversions.

Depending on the focus in your company, we recommend using the target ROAS with active Conversion Value Tracking.
If you are interested in BiddingLab, we will always provide you with an individually tailored analysis as part of the account check, which will also include a recommendation as to whether a ROAS or rather a CPA strategy is more suitable for you.

What influence do the selected target values have on my campaigns?

The campaign traffic is sensitive and reacts very differently to the chosen targets.

Although you have chosen a target ROAS or CPA strategy. Higher targets than currently achieved or have been achieved will lead to a reduction in traffic.
On the other hand, generous targets can increase traffic. The traffic then has a direct effect on the advertising effort, which can also either increase or decrease.

If a cost target is to be achieved in addition to the selected strategies, the target value of the strategy should either be equal to the current value or be lower.

It is therefore advisable, especially in the initial phase (at least 2 weeks), to give the bidder time to understand your portfolio and the corresponding traffic before you aim for higher goals. As soon as the bidder can meet these goals, he will try to increase the volume on his own. For you this behaviour is the best sign for an adjustment of the strategy.

But don’t think about jumping the gun here, because with every single step you will reach your goal more safely. The step size here should be a maximum of 20% every two weeks or until the new target is reached.

 

Interested? Contact us now!