How does the Target ROAS bidding strategy work in Google Ads?

Understanding Target ROAS

What is Target ROAS Bidding?

Target ROAS (Return on Ad Spend) is an automated bidding strategy in Google Ads that aims to maximize the conversion value generated for a specific return on ad spend. It uses machine learning to predict which ad auctions are most likely to lead to conversions, and then automatically sets bids to achieve an average ROAS equal to your specified target.

According to Google's definition:

Target ROAS bidding automatically finds an optimal CPC bid for your ad each time it's eligible to appear, with the goal of maximizing your conversion value, while trying to achieve an average return on ad spend (ROAS) equal to your target.

How Target ROAS Works

When you set a Target ROAS bid strategy, Google Ads uses historical information about your campaign and evaluates contextual signals present at auction-time to find the optimal CPC bid for each ad auction. These signals can include:

• Device
• Location
• Time of day
• Remarketing list
• Ad characteristics
• User's browser
• Language
• Operating system

By considering all these parameters, Google's bidding algorithm can predict the likelihood of a conversion and the potential conversion value. It then sets the appropriate bid to achieve your target ROAS on average.

Calculating Target ROAS Percentage

To determine your target ROAS percentage, use this formula:

Target ROAS % = (Revenue / Ad Spend) x 100

For example, if your weekly revenue from ads is $1000 and your weekly ad spend is $200, your achieved ROAS percentage would be:

($1000 / $200) x 100 = 500%

This means for every dollar you spend on ads, you get five dollars back in revenue. You can use your historical ROAS percentage as a benchmark when setting a new Target ROAS bid strategy.

When to Use Target ROAS

Target ROAS is best suited when you have:

• Specific efficiency targets
• Products with a similar return on investment
• At least 15 conversions in the past 30 days for the campaign
• A clearly defined conversion value or revenue amount

Setting Up Target ROAS in Google Ads

Prerequisites Before Using Target ROAS

Before diving into setting up Target ROAS (Return on Ad Spend), ensure you meet these key requirements:

• Have conversion tracking set up and recording accurate data in your Google Ads account. This is critical, as Target ROAS relies on conversion values to optimize bids.
• Accrue at least 15 conversions in the last 30 days for the campaign you want to optimize. This provides enough data for the algorithm to make informed bidding decisions.
• Determine a realistic Target ROAS based on historical performance. Analyze your past ROAS (conversion value / cost) to set an achievable target.

Step-by-Step Instructions to Set Up Target ROAS in Google Ads

1. Sign in to your Google Ads account and navigate to the Campaigns tab.
2. Select the campaign you want to optimize with Target ROAS.
3. Click the Settings tab and scroll down to Bidding.
4. Click Change bid strategy and select Maximize conversion value from the dropdown menu.
5. Set your desired target ROAS percentage. For example, a 500% Target ROAS means you aim to get 5 times your ad spend in conversion value (e.g., $50 in sales for every $10 spent).
6. Save your changes. The algorithm will now automatically adjust bids to meet your Target ROAS.

Note: It may take a few days for the algorithm to gather data and optimize performance fully.

Best Practices for Determining a Realistic Target ROAS

• Analyze historical data: Look at your campaign's ROAS for the past 30-90 days. This gives a benchmark for what's achievable. See more on setting realistic ROAS targets.
• Consider your profit margins: Ensure your Target ROAS covers your cost of goods sold and other expenses. For instance, if your profit margin is 25%, a 400% ROAS would be the minimum to break even (1 / 0.25 = 4).
• Start conservative and adjust gradually: Begin with a Target ROAS slightly below your historical average. Then, incrementally raise it every few weeks as the algorithm optimizes. Sudden, drastic changes can destabilize performance.

Common Pitfalls to Avoid When Configuring Target ROAS

• Setting the target too high: An unrealistic ROAS goal (e.g., 1000% when you normally achieve 300%) will limit your ads' visibility and sales volume. Be ambitious but grounded.
• Ignoring the learning phase: After changing to Target ROAS, allow at least 2 weeks for the algorithm to adjust before making significant changes.
• Making frequent, major adjustments: Each time you modify the target, the algorithm re-enters the learning phase. Make small changes (10-20%) no more than once every 2-4 weeks.
• Neglecting to monitor performance: While Target ROAS automates bidding, you should still regularly check your campaign's key metrics. Ensure the target remains aligned with your business goals.

By following these steps and best practices, you can effectively leverage Target ROAS bidding to drive profitable growth for your Google Ads campaigns.

Optimizing Target ROAS Performance

Once you've implemented Target ROAS bidding, it's crucial to continuously monitor and optimize your campaigns to ensure you're meeting your revenue goals while maintaining profitability. Here are some key strategies to improve your Target ROAS performance:

1. Identify Key Factors Impacting ROAS

Several variables can influence your ROAS, including:

• Product price and margin: Higher-priced or higher-margin products may generate more revenue per conversion.
• Audience targeting: Reaching the right audience more likely to convert can improve ROAS.
• Ad relevance: Ads closely matched to user search queries tend to earn better ROAS.
• Landing page quality: Relevant, user-friendly post-click landing pages can boost conversion rates.

Analyze your data to identify which factors correlate most strongly with higher ROAS. For example, you might find that ads for high-margin products targeted to remarketing audiences generate the best return.

2. Segment Campaigns by ROAS Potential

Not all products or audiences will have equal ROAS potential. Segmenting your campaigns can help you set appropriate ROAS targets and allocate budget more effectively.

Consider segmenting by:

• Product category: Group products with similar margins or price points together.
• Audience: Create separate campaigns for prospecting (new customers) and remarketing.
• Geography: Segment by location if ROAS varies significantly by region.

For instance, you might create a campaign for high-margin products targeting past purchasers, with a higher ROAS target than a prospecting campaign for lower-priced goods.

3. Use Experiments to Test ROAS Targets

Finding the optimal ROAS target often requires experimentation. Using Google Ads' Campaign Experiments, you can test different ROAS targets to find the right balance between volume and efficiency.

1. Set up a draft campaign with a higher or lower ROAS target than your control campaign.
2. Split traffic between the two versions (e.g., 50/50).
3. Run the experiment for at least 2-4 weeks to gather sufficient data.
4. Analyze results and determine the winning ROAS target based on your goals.

For example, if your control campaign has a 400% ROAS target, you might test 350% to see if you can increase revenue while still meeting profitability goals.

4. Leverage Value-Based Bidding

If you have products with varying price points or margins, value-based bidding can help you optimize for total profit rather than just revenue.

1. Import product-specific margins into Google Ads to enable conversion value reporting.
2. Analyze data to identify high-margin products to prioritize in your bidding.
3. Adjust ROAS targets to account for margin differences. For instance, set a higher target for low-margin products to maintain profitability.

By incorporating margin data, you can ensure your ROAS targets are aligned with bottom-line profitability goals.

5. Monitor and Adjust Regularly

ROAS optimization is an ongoing process. Regularly monitor your campaigns' performance and make adjustments as needed:

• Watch for dips in ROAS that may require lowering targets to maintain spend.
• Identify opportunities to raise ROAS targets for high-performing segments.
• Reallocate budget from lower-ROAS campaigns to those driving higher returns.

Tools like Google Ads' custom alerts can help you stay on top of significant ROAS fluctuations. By proactively managing your campaigns, you can ensure you're consistently meeting your efficiency goals while driving the greatest possible revenue.