It’s easy to think that keywords operate by the law of diminishing returns: as I push spend harder the ROAS decreases.
This is certainly true of clicks. If clicks were our objective then for a particular keyword, I could get, say, 1,000 clicks a month at £1 per click but to get 2,000 clicks a month I’d need to pay £2 a click.
As discussed in the article ‘How Google Ads bids‘, because Google bids more for the users that are more likely to convert, for a given keyword the ROAS is relatively steady as your spend and CPC go up.
The limiting factor is the volume of searches for that keyword.
Let’s call this relatively steady ROAS the ‘max. ROAS’.
Imagine two scenarios:
1. You set a Target ROAS of 500% for a keyword that has a max. ROAS of 250%.
You set up a campaign with a Target ROAS of 500%. The campaign has only one keyword with an intrinsic max. ROAS of 250% (i.e. on average clicks costing £1 generate £2.50 of revenue and clicks costing £10 generate £25 of revenue).
The campaign won’t hit the Target ROAS of 500% (as the ROAS is relatively fixed as CPCs increase – so whether your CPC is high or low you get the same ROAS of 250%).
Initially, Google will bid on the keyword, but once it’s established that it can’t acheive the Target ROAS of 500%, it will stop bidding.
2. You set a Target ROAS of 500% for a keyword that has a max. ROAS of 1,000%.
For this example, the Target ROAS is much lower than the max. ROAS.
Google will again try to achieve the Target ROAS of 500% – and do it by bidding very aggressively by submitting very high bids resulting in being absolute top nearly every time.
This campaign could be achieving a 1,000% ROAS. The Target ROAS of 500% may be driving a few more incremental orders (as you’ll be absolute top more frequently so probably have a better click-through rate) but it’s unlikely to be driving optimal CM3.
Ad Rank – your position in the auction is set by your ad rank – not just the bid.
Your Ad Rank is a function of:
- ad quality (expected click-through rate, ad relevance and landing page experience);
- the max. CPC bid;
- the Ad Rank thresholds (Google decides a threshold where it may not show any ads if the bids aren’t high enough);
- the competitiveness of an auction;
- the context of the person’s search and the expected impact of extensions and other ad formats.
You should start thinking about keywords as having relatively fixed ROAS (until you push them too hard when the ROAS will drop as you are giving Google permission to try and be absolute top on every search). e.g.
- Keyword A has max. ROAS of 150%
- Keyword B has max. ROAS of 375%
- Keyword C has max. ROAS of 525%
- Keyword D has max. ROAS of 780%
What happens when you run a campaign with multiple keywords/ad groups and one overarching Target ROAS?
You have a campaign with a wide range of keywords within it. You set a Target ROAS of 500%.
If you look several months later, Google will likely have done what you asked and the actual ROAS will be close to the Target ROAS of 500% (unless the target is ridiculously high or low).
How has it done this though? This is what we think Google is doing:
i) Pushing the highest ROAS keywords hard:
Have a look at your own data.
Go into Reports and filter for an ad group within the campaign that has a ROAS higher than the Target.
Now filter for Search network of ‘Google Search’ and Search keyword match type of ‘Exact match’ (i.e. impressions that are an exact match to your keywords).
Add ‘Impr.’; ‘Search exact match IS’; ‘Impr. Top (%)’ and ‘Impr. Abs Top (%)’ metrics.
You should see that your overall Exact search IS share is high (75%+) and the ratio of absolute top impressions / top impressions is high (80%+).
i.e. Google is pushing these keywords hard – bidding for nearly all relevant search terms even when the user demographics suggest a low likelihood of converting. When Google bids you are nearly always the absolute top bid.
ii) Keywords with a ROAS above the Target give Google the slack to bid on keywords with a ROAS below the target:
Let’s simplistically say you have three types of keywords in your campaign:
- High ROAS keywords that are essentially maxed out;
- average keywords that are achieving an actual ROAS around the Target ROAS for the campaign with some headroom for more impressions;
- and low-performing keywords with an actual ROAS much lower than your campaign target and a low impression share.
Remembering that there is a relatively fixed maximum ROAS for a keyword, Google can only bid on the low-performing keywords because the high ROAS keywords are subsidising their low ROAS.
What happens if you lower the ROAS Target on the campaign?
If you lower the ROAS Target then the keywords that are maxed out will function as before, it will then push more volume through the keywords performing around the Target ROAS and the keywords with a substantially lower ROAS.
Why doesn’t Google stop bidding on low-performing ad groups?
Google can probably drive more revenue at the Target ROAS by not bidding on the low-performing keywords and bidding more aggressively on the medium Target ROAS keywords – why doesn’t it do that?
We think that Google will bid on all keywords and ad groups in a campaign as long as it can achieve the overall Target ROAS (i.e. as long as the lower-performing keywords can be offset against higher-performing keywords).
So we believe that if you want to drive more conversion value at a higher ROAS for a campaign with a wide spread of ad group ‘max. ROAS’ within it, then you need to turn off the lowest performing ad groups/keywords. This will make Google bid more frequently in the medium-performing ad groups (assuming the top-performing ad groups are maxed out).
This is one of the reasons that ad groups within a campaign should have similar ROAS. If the poorest performing ad groups are in their own campaign then you can manage the performance of that campaign more efficiently (or turn it off completely).
>>> Read the next article: How to structure your accounts (campaigns vs ad groups)
>> Purchase an ANALYSIS OF YOUR GOOGLE ADS ACCOUNT
The interactive video below highlights some of the analyses we cover:
Please be really careful making changes to your Google Ads account
- Google doesn’t always respond how you (or we) think it will. The way we think about Google Ads may not be the best set-up for your account.
- Only change one thing at a time.
- If possible, always use an experiment to test a change – particularly for significant changes such as moving bidding strategy to Maximize conversion value (Target ROAS).
- Protect your financial downside by testing with limited spend in the experiment/change. Note that moving to a smart bidding strategy requires a learning phase where Google may not be efficient.
- Be careful if adding/removing primary conversion actions – changing what Google is converting to can radically change what and who Google targets and how much it’s willing to spend.
- Remember, all changes to your account are at your own risk. Mapflo shall not be liable for any damages; losses; lost revenue or lost profit.
Glossary of Terms
AOV = Average Order Value
CM1 = Contribution Margin 1 = revenue minus COGS (cost of goods sold) in an order.
CM2 = Contribution Margin 2 = margin on an order after all costs directly attributable to that order such as COGS, shipping, payment fees, customer service etc. (except for marketing).
CM3 = Contribution Margin 3 = CM2 less marketing spend. An ‘Estimated CM3’ value uses an assumed CM2 %.
CPA = Cost Per Action. In this report taken to mean cost per conversion or cost per order.
Keywords = words or phrases (assigned to an ad group) that match a user’s search term and trigger Google to bid to show an ad.
Lifetime CM3 = CM3 from all orders (or subscription payments) for a customer.
Profit = CM3 less all fixed overheads (such as salaries and office rent). Hence Optimising CM3 also optimises profit at the same cost base
ROAS = ‘Return On Ad Spend’ = conversion value divided by cost. A ROAS of 400% means you get four pounds of revenue back for every pound of ad spend.
Search term = the word or phrase that a user searches for on Google.