How to set proper target ROAS? (E-commerce)
Hey guys, how exactly do you go about making the switch to “Target ROAS”? For example, google is recommending me to switch to a 310% Target ROAS based off of my recent performance on my PMax campaign. Would I just apply the recommended percentage? I would obviously love for my store to be doing 4-500% ROAS.
Any insight helps, happy holidays!
The short answer is:
No, don’t just apply the recommended 310% target return on ad spend (ROAS).
Google’s recommendation is a good starting point based on past performance, but it may not align with your profit goals.
To set a proper, sustainable target ROAS, you first need to calculate your true break-even ROAS by accounting for your cost of goods sold (COGS), operating expenses, and ad costs.
Your target ROAS should be above this break-even point to ensure profitability.
You can start with Google’s suggested 310% and gradually increase it, but a robust solution for more accurate data and bidding is to use server-side tracking via the Google Ads API combined with Google Tag Manager (GTM) and a service like Stape or Google Cloud Platform, as this mitigates data loss from browser restrictions and improves the accuracy of the conversion data (Standard Events) Google receives.
The long answer is:
To successfully transition to Target ROAS bidding, you need to move beyond just Google’s suggestions and understand the economics of your business.
Your desired 400-500% ROAS is aspirational, but an unrealistic target can immediately throttle your campaign’s reach and severely limit conversions.
Your immediate target should be your break-even ROAS plus your desired profit margin.
To calculate your break-even point, you must know your average order value (AOV), your COGS, and your operating expenses as a percentage of AOV.
For example, if your average item sells for $100 and costs you $30 (COGS), and your operational costs are another $10, you have $60 in gross profit before ad spend.
If you want a 20% profit margin on that $100 sale, you need to make $20 in profit.
This leaves $40 for ad spend.
Your break-even ROAS is calculated as (AOV / (AOV – COGS – OpEx)) and your target is (AOV / (AOV – COGS – OpEx – Profit)).
Using accurate, reliable data is paramount for any automated bidding strategy like Target ROAS.
This is where server-side tracking comes in as an excellent and cost-effective solution.
Browser limitations and privacy changes are increasingly causing data loss and inaccuracies with traditional client-side tracking, where conversion data is sent directly from the user’s browser.
This is because ad blockers, Intelligent Tracking Prevention (ITP) from browsers like Safari, and similar measures prevent the proper firing of tags.
Target ROAS bidding relies heavily on the quality and volume of your conversion data – specifically your PurchaseAdd to CartBegin Checkout
If Google isn’t accurately receiving all of your conversions and their corresponding values, the algorithm can’t bid effectively.
The solution is implementing server-side tracking, which involves setting up a server-side container in Google Tag Manager (GTM).
When a user performs an action on your site, the data is sent to your GTM server container first, instead of directly to Google Ads.
From there, the server processes the data and sends it to the Google Ads API, Facebook Conversions API, or other destinations.
This method is exceptionally cheap and effective.
You can use a platform like Stape or set up a small server on Google Cloud Platform to run your server-side GTM container.
By using the Google Ads API via a server-side setup, you bypass browser restrictions, ensuring that a much higher percentage of your Standard Events are accurately recorded and sent to Google Ads.
This more complete data set leads to a stronger signal for the Target ROAS algorithm, allowing it to make more informed and precise bidding decisions, ultimately improving performance and allowing you to confidently set and hit that higher target ROAS you desire.
The cost is often minimal – just the cost of a basic hosting service for the server-side container, which is generally a fraction of the ad spend it helps optimize.
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